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Is Global Net Lease a Millionaire-Maker REIT?


Nov 29, 2020 by Reuben Gregg Brewer
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If you're looking to create a million-dollar portfolio, a few high-yield stocks could help you get there. Global Net Lease (NYSE: GNL) certainly has a big yield. But that huge 9.3% yield, when many of its net lease real estate investment trust (REIT) peers are yielding closer to 5%, might actually be a sign of trouble. Here's what you need to know before you add Global Net Lease to your growing nest egg.

A slightly different model

The first thing to note about Global Net Lease is in its name: net lease. The REIT, like its peers, owns single-tenant properties for which the tenants are responsible for most of the operating costs of the assets they occupy. It's generally considered a fairly low-risk business model.

Simplifying things a bit, Global Net Lease just has to sit back and collect rents. And, despite COVID-19, it's been doing a pretty good job of it, with a collection rate of 97% in the third quarter. In other words, its business is holding up fairly well in the face of adversity.

But there are some notable differences between Global Net Lease and its peers. For example, the REIT's portfolio is broken down between office (48% of rents), industrial/warehouse (47%), and retail (5%). Most other net lease REITs have a greater focus on retail assets, with some entirely dedicated to the sector. Even W.P. Carey (NYSE: WPC), which is probably the most diversified name in the net lease space, has 17% of its portfolio in retail and another 5% in self-storage. Global Net Lease, then, has a very business-oriented portfolio. That's not inherently good or bad but something to note as you compare it to other names in the space.

In addition, as its name implies, it has a global focus. More than a third of its portfolio is located in Europe, with the rest in the U.S. market. That's pretty similar to W.P. Carey's breakdown and not inherently concerning. That said, investors need to recognize that monitoring the economic conditions in the United States is not enough. In fact, with COVID-19 cases spiking again in Europe, this exposure is likely a headwind that's restraining Global Net Lease's shares and those of W.P. Carey.

Quality is another issue to think about. Global Net Lease's portfolio is weighted heavily toward investment-grade tenants. Nearly two-thirds of its rents come from such tenants, around twice the level at W.P. Carey. It's also among the highest of its direct competitors. This materially increases the likelihood of getting paid every month.

Global Net Lease's average lease length of 8.7 years is also pretty strong, though a couple of years less than W.P. Carey. Still, at 8.7 years, a short-term problem (like a recession) will likely pass before it has to deal with material lease renewals -- another net positive on the rent collection front.

Nothing is perfect

So far, Global Net Lease sounds pretty enticing, even taking into consideration the concerns about its European exposure. But there are a couple of additional factors to consider.

First off, the dividend. Global Net Lease cut its dividend by 25% in the second quarter. That was necessary because the REIT's funds from operations (FFO), which is like earnings for an industrial company, wasn't enough to cover the payout. But even after the cut, the REIT's FFO payout ratio was basically 100% in the third quarter. To be fair, after taking out certain items, Global Net Lease's adjusted FFO (AFFO) payout ratio was a more-acceptable, though still a little high, 87%.

Some comparisons will help here. W.P. Carey's AFFO payout ratio was around 91% in the third quarter, but it has actually increased its dividend each quarter in 2020. And its FFO payout ratio was a far-lower 77%.

Meanwhile, diversified net lease peer VEREIT (NYSE: VER) has an AFFO payout ratio of around 50% after its dividend cut earlier in the year. All in, Global Net Lease was forced to cut its dividend, which no REIT wants to do, and yet still hasn't fixed the elevated payout situation. So while the REIT is doing reasonably well portfolio-wise right now, it still appears to be cutting things kind of close when it comes to investor distributions. That isn't comforting news if you're a conservative investor.

Adding to the discomfort is the company's management. W.P. Carey and VEREIT are both internally managed REITs, which means the people who run them are employees of the REITs. Global Net Lease is sponsored by AR Global, which has sponsored or cosponsored 14 other REITs. Essentially, Global Net Lease pays management fees to AR Global. This isn't inherently a bad setup, but it can lead to questions about costs, contract structure, and potential conflicts of interest.

For example, AR Global also advises American Finance Trust (NASDAQ: AFIN), which Global Net Lease notes in its annual report has a similar investment approach but is focused on just the U.S. market. Still, around two-thirds of Global Net Lease's portfolio is domestic, so investors have every right to wonder: Which AR Global-controlled REIT gets deal preference?

Making things even more complicated, the REIT's CEO and CFO hold similar positions at other AR Global companies. And in the "risks" section of Global Net Lease's annual report, comments about the fee structure between the REIT and AR Global are anything but settling: "These arrangements, coupled with the fact that the Advisor does not maintain a significant equity interest in us, may result in the Advisor taking actions or recommending investments that are riskier or more speculative than an advisor with a more significant investment in us might take or recommend."

This isn't to suggest Global Net Lease is bad, per se, but there's a lot more investors need to consider here than would be the case at an internally managed REIT.

Tread carefully

Adding a high-yielding and globally diversified net lease REIT to your portfolio could definitely help you build a seven-figure portfolio. But Global Net Lease may not be the one you want to add to the mix when you consider its still-high payout ratio (even after a dividend cut) and complex management structure. For more conservative dividend investors, peer W.P. Carey would probably be a better option.

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Reuben Gregg Brewer owns shares of VEREIT and W. P. Carey. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.