Global Net Lease (GNL +0.43%) stands out among real estate investment trusts (REITs). Its dividend yields an eye-popping 11.2%. That's well above the REIT sector's average of around 3%.
That big-time payout likely makes income-focused investors wonder if the diversified REIT is a buy. Here's a look at whether it can maintain this big-time dividend.
Image source: Getty Images.
Holding firm on the payout, despite the numbers
Global Net Lease addressed the concerns surrounding the sustainability of its dividend first thing this year. In early January, the REIT announced it intends to continue paying dividends at its current rate of $0.40 per share a quarter ($1.60 per share annualized).
However, the REIT's intentions weren't enough to convince investors it could maintain the payout because the numbers suggest otherwise. Over the last 12 months, the company had a dividend payout ratio of 107% of its funds from operations (FFO). Meanwhile, the REIT has a fairly high leverage ratio of 7.4 times its net debt to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
In addition to that, investors remain concerned about the makeup of its portfolio. While 52% of its properties are industrial/distribution properties benefiting from growing demand, the rest are office (43%) and retail properties (5%) facing continued headwinds from the pandemic. This is making investors worry that tenants of those properties might not renew their leases upon expiration.
All these factors have investors concerned that the company won't maintain its current dividend rate much longer.
A deeper look shows some reasons for optimism
Global Net Lease believes it can continue paying its big-time dividend despite those troubling numbers. One major factor is the strength of its diversified real estate portfolio. The company ended the third quarter with more than 300 properties across the U.S., Canada, and Europe net leased to more than 130 high-quality tenants across almost 50 industries.
The company focuses on owning high-quality, mission-critical buildings secured by long-term net leases with mainly investment-grade tenants. That lease structure makes the tenant responsible for building maintenance, property insurance, and real estate taxes. That provides Global Net Lease with stable cash flow. Meanwhile, it focuses on investment-grade tenants (55% of its annualized rent) because they have the financial strength to meet their financial obligations during economic downturns.
Global Net Lease has enhanced its portfolio over the past year. It invested nearly $500 million to acquire 25 properties leased to high-quality tenants last year. These new additions will boost its cash flow in the coming quarters. In addition, the REIT signed 11 lease renewals or extensions covering 1.5 million square feet of existing space, ensuring those properties will continue generating steady rental income for years to come.
Those moves have already paid dividends. Global Net Lease's core FFO jumped 27.4% in the fourth quarter to $44.1 million. With its dividend outlay at $40.3 million, its payout ratio was a more comfortable 90% in the period. Meanwhile, FFO should continue growing as it benefits from recently completed acquisitions (it closed more than $170 million of purchases during the fourth quarter). This FFO growth will provide even more breathing room for the dividend.
Global Net Lease also has a solid balance sheet. It has borderline investment-grade credit (one agency rates its credit investment-grade, and another has it a notch below) because of the overall stability of its portfolio. That enables it to borrow money at low rates. It also has limited near-term debt maturities. These features provide it with some financial flexibility to continue making acquisitions.
Finally, Global Net Lease has been addressing its portfolio's makeup. It has reduced its exposure to the office sector (from 48% in the third quarter of 2020 to 43% in 2021's third quarter) by growing its industrial portfolio (from 47% to 52% over that same period). It has more industrial deals in the pipeline to continue growing that side of its portfolio.
A high-risk, high-yield REIT
While Global Net Lease's management team believes it can maintain its high-yielding dividend in the near term, longer-term questions remain. This means the REIT is a bit too risky for income-seeking investors to buy right now. It needs to improve its payout and leverage ratios while enhancing its portfolio to put its big-time dividend on a firmer foundation.
