Updated on March 12th, 2019 by Nathan Parsh
Real estate investment trusts – or REITs, for short – give investors a method to indirectly own high-quality real estate assets without the hassles and headaches associated with traditional real estate investment strategies.
They are also a great source of dividend income. Thanks to the steady cash flows delivered by rent or lease payments, REITs often have dividend yields well above the average stock in the S&P 500.
Global Net Lease (GNL) is one example of this.
The nearly 12% dividend yield make it stand out even among the short list of high dividend stocks with 5%+ yields. You can see the full list of all stocks with 5%+ dividend yields here.
Even better, the company pays monthly dividends. This is very rare, as the vast majority of publicly-traded companies pay dividends on a quarterly basis. Sure Dividend has compiled a database of all monthly dividend stocks, which you can access below:
Global Net Lease’s very high dividend yield and monthly dividend payments make it an intriguing stock for income-oriented investors.
This article will analyze the investment prospects of Global Net Lease in detail.
Business Overview
Global Net Lease is a triple net lease real estate investment trust that operates in many of the most important global economies, including the United States and various countries in Europe.
Triple net leases are those where the occupant is responsible for paying the three major secondary costs associated with buying real estate:
- Maintenance costs
- Insurance costs
- Property taxes
Triple net leases are also called net-net-net leases.
Global Net Lease rents its international property portfolio to various corporations, often investment grade. The trust typically locks in its tenants under long-term contracts – Global Net Lease has a weighted average remaining lease term of 8.3 years.
Before becoming a publicly-traded investment vehicle, Global Net Lease was a privately-held REIT named American Realty Capital Global Trust.
One of the characteristics about GNL that stands out most to its investors is its global presence.
Source: Investor Presentation
The company is highly diversified, with operations in the domestic United States as well as Europe. These markets were strategically targeted based on their high sovereign credit ratings, mature & growing economies, and low unemployment rates.
More specifically, Global Net Lease’s current portfolio includes investments in the following countries:
- United States
- United Kingdom
- Germany
- The Netherlands
- France
- Finland
- Luxembourg
Global Net Lease is definitely a worldwide operation, but its United States portfolio still dwarfs its presence in Europe.
Presently, Global Net Lease has 273 properties in the United States, which compares very favorably to its 69-property presence in Europe. Approximately 78.3% of the trust’s tenants have a credit rating as investment grade.
Global Net Lease’s properties are fairly diversified as well, with only financial services occupying more than 10% of total properties.
Properties not falling into one of the large subsections are grouped together in the “other” category. This category makes up nearly 40% of all properties.
Growth Prospects
Since its inception in 2012 (as a private entity), Global Net Lease has grown by raising capital through the equity and debt markets and then deploying this new money into additional real estate assets.
In December of 2016, the trust also made the needle-moving acquisition of ARC Global Trust II, Inc.
This $3.1 billion transaction was very substantial for global net lease, particularly considering that the acquiring REIT has a market capitalization of $1.5 billion.
Over time, Global Net Lease has also been added to several important equity and real estate indices, including the MSCI U.S. REIT Index and the Russell 2000 and Russell 3000 indices.
Looking ahead, Global Net Lease’s growth will be largely driven by the execution of debt or equity issuances and the subsequent deployment into more properties, generating additional rental income.
Intuitively, this makes sense. As a real estate investment trust, Global Net Lease is required by law to pay out the majority of its net income as distributions to its shareholders.
Thus, Global Net Lease turns to the public markets to raise more capital and drive fundamental growth. Global net Lease needs to turn to capital markets to drive growth because adjusted-funds-from-operation, or AFFO, have been relatively stagnant over the past few years.
Competitive Advantages & Recession Performance
Global Net Lease’s competitive advantage comes from its considerable geographic diversification.
By having global operations, Global Net Lease is exposed to a much larger number of asset acquisition opportunities than its domestic-only counterparts.
The trust also benefits tremendously from its high-quality tenant base.
Global Net Lease’s Top Ten Tenants include well-known names such as FedEx (FDX), the U.S. General Services Administration, ING, and Family Dollar. The trust isn’t too top heavy either as the top 10 tenants accounted for only 33% of total rents.
This REIT also has a very long-dated lease maturity profile. The company has no leases maturing in 2019 and only 7.9% of its leases expire through 2022.
From a debt perspective, Global Net Lease’s positioning is reasonable for a REIT. The company’s net debt to adjusted EBITDA was 7.9x at the end of the fourth quarter of 2018. This would be quite high for a traditional corporation but is in line with other net lease REITs.
Source: Investor Presentation
Further, the company has an interest coverage ratio of 3.8x and a weighted average interest rate of 3.1%, giving it some margin for error in case of a recession or isolated operational difficulties.
Global Net Lease was not a publicly-traded real estate investment trust during the last recession of 2007-2009, so we can’t say for sure how the trust would react during an economic downturn. Valuing real estate investment trusts is different than valuing corporations because of the nature of REIT accounting.
Since the primary business of REITs is to own and rent long-lived assets – their properties – they incur significant depreciation charges which impair their GAAP earnings-per-share and make the traditional price-to-earnings valuation metric essentially meaningless.
Given this, we don’t know how the dividend would fare in a recession. Global Net Lease’s AFFO totaled $2.11 in 2018. The trust’s dividend was $2.13 over the same time period, meaning that the dividend was not covered by AFFO.
This has been the case in most years since Global Net Lease went public in 2015. Due to this fact, the trust’s dividend could be at risk for a cut if the economic conditions weaken and cause a severe decline in AFFO.
We don’t anticipate AFFO will grow through 2024 due to the lack of historical growth for this metric.
Valuation & Expected Total Returns
Due to lack of AFFO growth, Global Net Lease’s future shareholder returns will be composed of valuation changes and dividend yield.
From 2015 to 2018, shares of Global Net Lease have an average price-to-adjusted-funds-from-operation of 10.2. Due to lack of AFFO growth over the past few years and question marks regarding how the trust would perform during a recession, we have assigned a target price-to-adjusted-funds-from-operation of 8.5 for 2024.
Shares currently trade at the price of $17.82. Using estimated AFFO of $2.15 for 2019, the stock has a price-to-adjusted-funds-from-operation of 8.3. If shares were to expand to our target valuation, shareholders would see an additional 0.5% added to annual returns over this time period.
Global Net Lease’s dividend yield is 11.9% currently. For context, the average dividend yield within the S&P 500 is currently 2.0%. By comparison, Global Net Lease is an attractive stock for generating income.
The current yield is also well above the stock’s four-year average yield of 9.4%. We should note that the trust is likely to pay out $2.13 per share in dividends in 2019, the same amount that it has paid since 2016.
Investors looking for dividend growth will likely be disappointed by Global Net Lease. The expected dividend payout ratio for 2019 is 99%, which is high even by REIT standards.
Expected total annual returns are as follow:
- 0% AFFO growth
- 0.5% multiple expansion
- 11.9% dividend yield
Overall, this yields total expected returns of 12.4% per year, with the added note that the dividend is risky and may not be sustainable if the payout ratio rises above 100% at any point moving forward.
Final Thoughts
Global Net Lease offers a very high dividend yield and makes monthly dividend payments. This makes the trust attractive to investors looking for high levels of monthly income. More than 78% of Global Net Lease’s tenants have an investment grade credit rating.
That being said, the public version of Global Net Lease has not been tested during an economic slow down and the dividend often consumes all (or more) of adjusted-funds-from-operation.
While we don’t have a sell rating on shares due to the 12%+ potential annual return, we find that Global Net Lease should only be purchased by investors with a very high risk tolerance.
