Global Net Lease: Invest For High Yield, But Understand Risk (NYSE:GNL)

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Overview

Global Net Lease, Inc. (NYSE:GNL) is a diversified real estate investment trust (REIT), primarily operating in office (48 percent) and industrial (47 percent) real estate properties located in the United States, Canada and Western Europe. The remaining 5 percent is invested in retail properties. Almost all its properties are occupied. GNL has been paying regular quarterly dividends since the third quarter of 2019, and its current yield is 10.95 percent. Prior to that, the company used to pay monthly dividends, and that was quite strong and steady too. However, it has a very high pay-out of 90 percent.

Global Net Lease “acquires, owns and manages a high-quality, mission critical, diversified portfolio of commercial properties net-leased on a long-term basis to investment grade and creditworthy tenants.” This REIT leases primarily to reputable clients like FedEx Corporation (FDX), Golden Star Acquisition Corporation (GSA), Whirlpool Corporation (WHR), ING Groep N.V. (ING), Penske Automotive Group, Inc. (PAG), Finnair Oyj (OTCPK:FNNNF), etc. At present, this company has a client base of more than 100 clients, with long-term lease agreements. Most of these lease contracts come with a clause of committed rent increments.

Global Net Lease has invested almost $4 billion in approximately 300 properties, among which more than 200 properties are located in the United States, and remaining properties in the United Kingdom, Canada, Puerto Rico and in the six nations of the European Union. Global Net Lease’s industrial/distribution facilities include properties which span manufacturing, traditional and cold storage, medical processing, and airplane repairing. GNL’s office properties are net leased to single tenant occupants located at central business districts (CBD). GNL’s retail portfolio includes specialty retail, malls, casual dining, etc. GNL’s retail tenants provide services which have shown to be e-commerce resistant.

Institutional investors hold 73.5 percent shares of Global Net Lease. The three big asset management firms namely BlackRock Inc, Vanguard Group Inc, and State Street Corporation own almost 40 percent of GNL. GNL’s shares are constituents of quite a few highly rated exchange traded funds (ETFs), such as iShares Core S&P Small-Cap ETF (IJR), iShares S&P Small-Cap 600 Value ETF (IJS), Vanguard Tax-Managed Small Cap Fund Admiral Shares Inst (VTMSX), SPDR S&P 600 Small Cap Value ETF (SLYV), DFA Real Estate Securities (DFGEX), etc.

Market Price Performance

Global Net Lease has performed poorly since it was listed in June 2015. The stock was listed around a price of $28, which slowly came down to $24.67 before a 1:3 share split on 1st March, 2017. But, since the share split, its price has dropped by almost 43 percent in the past 63 months. GNL’s price dropped by 27 percent and 36 percent over the period of past three and five years respectively. However, the majority of this price loss occurred in the past 12 months, as it lost 24.2 percent of value during this period.

Over the short term, performance is not good, either, as the price dropped by 6.2 percent, 2.3 percent, and 7.8 percent over the period of one month, three months and six months, respectively. In my opinion, Global Net Lease will suffer further price loss as indicated by its simple moving averages ((SMAs)). However, that price loss might be minor. 200 days SMA (15.44) is placed 5 percent higher than 100 days SMA (14.67). Also 50 days SMA (14.74) is 9 percent higher than the 10 days SMA (13.53).

Valuation

However, in my opinion, the price performance is not truly reflecting the operational growth of this diversified REIT. Global Net Lease has recorded a revenue growth of 11.3 percent and 12.4 percent over the period of three years and five years respectively. Going forward, the earnings are expected to grow at a level of six percent over the past three to five years. In the past three years, net income has recorded a positive growth. This REIT has also recorded a fund flow from operations (FFO) growth of 15.23 percent over the past one year. However, there has been a steady decline of FFO in between 2018 and 2020. Quarterly FFO declined from $0.54 to $0.29 during this period.

GNLs price multiples also indicate an undervaluation. Price/Sales (P/S) of 3.6, and Price/Book (P/B) of 0.93 implies that investors have not shown adequate faith in this stock. Further, low Price/Cash Flow (7.39), and Price/Rental Revenue (2.67) may mean there is a skepticism regarding the company’s ability to continue the current revenue and earnings performance. A few probable reasons might be the skepticism in investing in small sized office and industrial focused REIT in uncertain economic scenarios, not retaining enough earnings for reinvesting it for future growth, and a declining FFO in between 2018 and 2020. Nonetheless, it is easy to say that the Price/FFO is also quite low at 8.1

Global Net Lease is generating good revenue and earnings, and is thus paying 10+ percent dividend. A high concentration in office and industrial real estate properties, strong tenant base, consistently high occupancy levels, and long lease terms will thus drive long-term value for GNL’s shareholders. However, investors have to be content with the yield, and forget about price growth. And the long-term sustainability of this high yield is also questionable.

Risk

In my opinion, investors can buy this stock provided they clearly understand the underlying risks. I am of the view that Global Net Lease is moving in the right direction. Its strong operating performance has enabled the REIT to record a five-year average dividend yield of more than 10.5 percent. I cross-checked the pay-outs with corresponding FFO in the previous quarter, and found that it has been able to generate sufficient funds, and did not pay any dividend out of its capital.

However, the payout ratio has been quite high, around 90 percent, which may suggest that the company is not very much keen on its expansion. Being a small-cap diversified REIT with a market capitalization of only $1.42 billion, it does cause concern over its long-term sustainability due to its limitation in raising external debts. In absence of capital expenditure, either through retained earnings or external debt, this REIT will not be able to generate a similar level of revenue growth, which will ultimately impact its earnings and FFO.

So, I would buy or hold equity shares of Global Net lease with adequate hedging. My suggestion will be to buy a October 21 (five month forward) put option at an exercise price of $12.5. The bid-ask range of $12.5 October 21 put option is $0.1 to $0.7. So, investors stand a chance to buy this option at a very low premium in order to protect their existing exposures and enjoy the 10 percent-plus dividend while that’s available.

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