7% Yields From Global Net Lease With Strong Coverage (NYSE:GNL)


In a market hungry for yields, investors have resorted to all sorts of tactics to try and get their fill. Some have worked and others have not been so fortunate. Over the last year, we have seen the situation get more desperate for investors, as the Federal Reserve’s war on interest rates has created some further turbulence. For example, one of the biggest bond funds actually has a negative yield, but many are not aware of this and park billions there. Hence, one has to look under the hood to find the right securities. We do believe we have some preferred shares with a rather large margin of safety that deserve consideration.

Global Net Lease, Inc. 7.25% CUM PFD A (GNL.PA) and

Global Net Lease, Inc. 6.875% PFD SER B (GNL.PB)

The two classes of preferred shares yield close to 7.00% at the present price, and that should make most people stand up and take notice. The A series are callable in September 2022 and GNL.PB shares are callable in November 2024, but we see call risk as low. Regardless of the call risk, buying this today gives investors a fantastically well-covered 7.0% plus yield. We make our investment case for this by first outlining the company itself.

The REIT

Global Net Lease (GNL) has a set of prime properties across 10 countries leased to predominantly investment grade tenants.

(Source: GNL presentation)

It has close to 300 total properties across 47 different industries. The portfolio is almost fully leased and has a weighted average lease term of close to 9 years.

(Source: GNL presentation)

GNL’s portfolio resilience was apparent during COVID-19. It collected 99% of rents due from the top 20 tenants, and the overall number was in excess of 97%.

(Source: GNL presentation)

The ultra-high rent collections were no doubt helped by a very large weighting to industrial assets and a minuscule weighting to retail.

(Source: GNL presentation)

That portfolio quality and rent collections are better than most REITs we follow, and GNL should be a top triple-net REIT based on those factors.

Why This Is Not A Top Triple-Net REIT

While the strong positives of a fantastic asset base and prime tenants will win GNL accolades, it does have an external management structure. We don’t reject external managers just on principle, but this one has shown exactly why external managers get a bad reputation. GNL’s external manager is incentivized to issue equity, and they have not held back on that. Equity has been issued relentlessly despite shares trading so far below NAV.

ChartData by YCharts

When we first started following this REIT, we had estimated an NAV of close to $25. Serial equity issuance below NAV has now put NAV at close to $20. AFFO per share has fallen alongside that and gone from more than 55 cents to 46 cents in the most recent quarter. So, GNL has issues, and unless issues are dealt with, the company is best handled in a more prudent manner.

But The Preferred Is A Very Different Case

GNL’s dilutive equity raises, while bad for the common shareholder, puts out more and more buffer in front of the preferred shares. The preferred shares form a very small part of the capital structure, and the equity raises are ultimately additional protection for the company.

(Source: GNL presentation)

One point we would add to the chart above is that the common equity here is based on market value. We estimate that the current NAV is at least $20/share, and real tangible equity buffering the preferred shares is closer to $2.0 billion.

Another thing to examine this is the buffer for the preferred dividends. We can work through by looking at the preferred share dividends as a percentage of the AFFO.

(Source: GNL 10-Q)

In the current quarter, the preferred shares consumed $4.6 million in dividends. Post that deduction, the company had AFFO of $40.9 million.

(Source: GNL 10-Q)

Thus, AFFO has a 9X buffer for the preferred dividends, a rather high level.

What About The Debt?

So we now know what is buffering the preferred shares, but what about the debt that lies ahead of it? GNL has about $2.1 billion of debt as seen in the chart above and about two-thirds is non-recourse property-level debt. That means that if a certain property/tenant gets into trouble, the REIT can walk away from that and the debt related to that property. GNL’s overall net debt-to-adjusted EBITDA numbers may appear high, but the property-level debt negates all of that.

(Source: GNL presentation)

Additionally, thanks to exceptionally low rates in Europe, GNL still has a fantastic interest coverage ratio of almost 4.0X.

Conclusion

GNL.PA shares have a solid 7.12% plus yield. GNL.PB yields very close to 7%. Both are strong cash yields in a market starved of real returns. While both are callable, we give that a very low probability. But for those that fear that outcome, buying GNL.PB slightly under par may be a better alternative. GNL’s debt structure, high grade properties and constant common share issuance make this a safe bet for 7% returns over the next few years.

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Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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