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Ben Reynolds
Ben Reynolds
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Global Net Lease: Over 9% Yield and Monthly Dividends, but 104% Payout Ratio

Exploring the investment prospects of this REIT in detail

June 19, 2017 | About:

(Published by Nick McCullum on June 19)

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 Inc. (NYSE:GNL) is one example of this.

The REIT’s 9%-plus dividend yield make it stand out even among the short list of high dividend stocks with 5%-plus yields.

You can see the full list of all 416 stocks with 5%-plus 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.

You can see the full list of all 29 stocks that pay monthly dividends here.

Global Net Lease’s very high dividend yield and monthly dividend payments make it an intriguing stock for income-oriented investors.

Business overview and corporate history

Global Net Lease is a triple net lease REIT 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 (NNN) 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 9.5 years.

GNL Global Net Lease Company Highlights

Source: Global Net Lease May 2017 Investor Presentation, slide 6

Before becoming a publicly traded investment vehicle, Global Net Lease was a privately held REIT named American Realty Capital Global Trust.

Importantly, the company’s previous name is not American Realty Capital Properties (ARCP) – note the slight difference in name. This is a separate REIT that experienced significant negative media attention after both the chief financial officer and chief accounting officer made crucial accounting mistakes that resulted in an overstatement of its adjusted funds from operations in 2014.

With that in mind, Global Net Lease’s name change was possibly done to avoid association with this scandalous (yet separate) REIT.

One of the characteristics about Global that stands out most to investors is its global presence.

The company is highly diversified, with operations in the domestic U.S. as well as Europe. These markets were strategically targeted based on their high sovereign credit ratings, mature and 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

More details about the company's globalized business model can be seen below.

GNL Global Net Lease The GNL Advantage

Source: Global Net Lease May 2017 Investor Presentation, slide 4

Global Net Lease is definitely a worldwide operation, but its U.S. portfolio still dwarfs its presence in Europe.

Presently, the company has 243 properties in the U.S., which compares very favorably to its 69-property presence in Europe.

GNL Global Net Lease Business Model

Source: Global Net Lease May 2017 Investor Presentation, slide 8

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 last year, 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 the acquiring REIT has a market capitalization of $1.5 billion (the stark difference between the two numbers is because we are comparing enterprise value to market capitalization, two fundamentally different metrics).

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.

GNL Global Net Lease GNL Timeline

Source: Global Net Lease May 2017 Investor Presentation, slide 9

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 REIT, Global Net Lease is required by law to pay out the majority of its net income as distributions to its shareholders.

Thus, the company turns to the public markets to raise more capital and drive fundamental growth.

Competitive advantage and recession performance

Global Net Lease’s competitive advantage comes from its considerable geographic diversification.

By having global operations, the company 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 (NYSE:FDX), the U.S. General Services Administration, ING Groep (NYSE:ING) and Dollar Tree's (NASDAQ:DLTR) Family Dollar.

This REIT also has a very long-dated lease maturity profile. The company has no leases maturing in the next three years and only 11% of its leases expire in the next six years.

More details about Global Net Lease’s tenant base and lease characteristics can be seen below.

GNL Global Net Lease Portfolio Highlights

Source: Global Net Lease May 2017 Investor Presentation, slide 12

From a debt perspective, Global Net Lease’s positioning is reasonable for a REIT. The company’s net debt to adjusted EBITDA was 7.2 times at the end of the most recent quarter. This would be quite high for a traditional corporation, but is in line with other net lease REITs.

Further, the company has an interest coverage ratio of 4.6 times and a weighted average interest rate of 2.7%, giving it some margin for error in case of a recession or isolated operational difficulties.

GNL Global Net Lease Q1 2017 Debt Overview

Source: Global Net Lease May 2017 Investor Presentation, slide 18

While Global Net Lease did not exist as a publicly traded REIT during the last recession of 2007 to 2009, I expect it would perform reasonably well compared to other REITs during an economic downturn because of its high-quality tenant base and long-dated lease expiration schedule.

Valuation and expected total returns

Global Net Lease’s future shareholder returns will be composed of valuation changes, dividend yield and growth in the trust’s profitability (as measured by funds from operations).

Valuing REITs is different than valuing corporations due to 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-earnings valuation metric essentially meaningless.

One useful and practical valuation alternative is to compare a REIT’s current dividend yield to its historical dividend yield.

If the trust’s current dividend yield is lower than normal, it is overvalued; conversely, if the yield is higher than normal, the REIT is undervalued.

Global Net Lease currently pays a monthly dividend of 17.75 cents, equivalent to a quarterly dividend of 53.25 cents and an annual dividend of $2.13.

The company’s current stock price of $22.69 is trading at a dividend yield of 9.4%. For context, the average dividend yield in the S&P 500 is currently 1.9%. By comparison, Global Net Lease is a fantastic security for generating current portfolio income.

For the purpose of valuation, the following diagram compares Global Net Lease’s current dividend yield to its long-term historical average.

GNL Global Net Lease Dividend Yield Analysis

Source: YCharts

Global Net Lease’s current dividend yield of 9.4% is slightly above its average dividend yield of 9.0% since inception.

Accordingly, the company is very slightly undervalued.

As with any high single-digit dividend yield, Global Net Lease should be carefully analyzed to ensure the safety and sustainability of its dividend payments.

Global Net Lease reported funds from operations of 51 cents in the first quarter of 2017. The company paid three monthly dividends of 17.75 cents during this time, for a total payout of 53.25 cents.

Some quick math shows Global Net Lease currently has a payout ratio of 104% using funds from operations. In the most recent quarter, the company’s distribution payments were unsustainable.

Looking further back, Global Net Lease had a FFO payout ratio of 93% and 97% in 2016 and 2015, respectively. Based on this, it is likely the company’s 104% payout ratio in the most recent quarter was an isolated phenomenon. Current and prospective investors should watch closely to ensure the company’s dividend coverage is restored.

To sum up, Global Net Lease’s exceptionally high dividend yield as well as its attractive valuation (based on yield) gives investors a solid probability of achieving double-digit returns if the company can return its FFO payout ratio to acceptable levels (below 100%) and avoid a dividend cut.

Final thoughts

Global Net Lease has two main characteristics that appeal to a wide variety of income investors:

  1. An exceptionally high 9% dividend yield.
  2. Monthly dividend payments.

With that said, the trust’s payout ratio (using funds from operations, not earnings) exceeded 100% in the most recent quarter, which raises concerns about the safety of future dividend payments.

If Global Net Lease can return its payout ratio to a more reasonable level, this stock is appealing for investors looking to generate meaningful monthly dividend income.

Disclosure: I am not long any of the stocks mentioned in this article.

About the author:

Ben Reynolds
I run Sure Dividend, a website that finds high quality dividend stocks for long term investors using the 8 Rules of Dividend Investing.

Visit Ben Reynolds's Website

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