Analyzing Global Net Lease (GNL)Analyzing Global Net Lease (GNL)

Analyzing Global Net Lease (GNL)

Analyzing Global Net Lease (GNL)

Analyzing Global Net Lease (GNL)

Global Net Lease took a nosedive recently, causing a shakeup in dividend rates and expectations for AFFO (Adjusted Funds From Operations). You might think this would be a good thing for our preferred shares, but hold on a sec. We’ve got some reasons why we believe it’s time to ditch those high-yield preferred shares.

At Conservative Income Portfolio, we’re more than just articles. Our members enjoy access to model portfolios, frequent updates, a chat room, and a whole lot more. So buckle up and let’s dive into why we’re hitting the exit button on those high-yield preferred shares.

In our recent content of Global Net Lease,Inc.( NYSEGNL), we stressed our decision to exit common shares at the right moment. We also bandied the favored shares listed below

  • Global Net Lease,7.25 Series A Accretive repairable Preferred Stock(NYSEGNL.PR.A)
  • Global Net Lease6.875 Series B Accretive repairable Perp Preferred Stock(NYSEGNL.PR.B)
  • Global Net Lease,Inc.7.50 Series D Cumulative Red Perp Preferred Stock(NYSEGNL.PR.D)
  • Global Net Lease,Inc.7.375 Series E Accretive Preferred Stock(NYSEGNL.PR.E)

Our recommendation leaned towards bonds as the most promising option. still, if investing in GNL is necessary, we still endorse for bonds as the better relative choice. presently, they are yielding around 8 to maturity on the 2027 notes, and we anticipate GNL should navigate through that period without significant issues( pertaining to the company’s prospects, not the current tip).

Source 15.66 On Common Or8.50 On Preferreds?

still, in the once two and a half months, the company has endured a significant decline, leading to a reset in the tip rate and AFFO prospects.

 

Analyzing Global Net Lease (GNL)
Image source; seekingalpha.com

 

Things are heating up and getting riskier for investors, especially after the events of Q4-2023. Global Net Lease (GNL) just wrapped up its merger with RTL, making the quarter a whirlwind of activity. Despite the noise, the company stuck to its pre-merger strategy, but there are some red flags investors should consider.

 

Image source; seekingalpha.com

 

There’s a notable shift happening at GNL: after years of aggressive acquisition tactics, they’re now focusing on offloading assets. This change in strategy raises some eyebrows, especially considering the potential long-term consequences.

Throughout the buying spree, GNL and RTL snapped up properties, often during the era of ZIRP (zero interest rate policy). But now, as they look to sell, they’re likely to fetch much lower prices. GNL even confirmed that the cash cap rate on these sales will hover around 7-8%.

So, why the sudden change in tune after a decade of buying binge?

 

Image source; seekingalpha.com | Ycharts

 

The numbers speak volumes, and it’s clear why there’s been a change in strategy. Global Net Lease (GNL) is facing a hefty net debt to adjusted EBITDA ratio of 8.4 times, with a significant portion of debt maturing in the near term. Specifically, their weighted average maturity at the end of Q4-2023 was a mere 3.2 years, posing a substantial challenge, especially for assets in the single tenant office category. With net debt totaling $5.3 billion and a weighted average interest rate of 4.8%, GNL’s liquidity stands at approximately $135.7 million, with an additional $206 million available on the credit facility. The breakdown of their debt includes $1 billion in senior notes, $1.7 billion in the multicurrency revolving credit facility, and $2.7 billion in outstanding gross mortgage debt. Moreover, 80% of their debt is fixed rate, including floating rate interest rate swaps, and their interest coverage ratio sits at 2.4 times.

You see, the real issue here is that 3.2-year timeline. And trust me, it’s going to cause even more headaches, especially for those assets in the single-tenant office category.

Image source; seekingalpha.com

 

 

 

GNL, on the other hand, doesn’t see it that way at all.

Let me break it down for you: GNL’s single-tenant office portfolio stands out because 70% of it consists of what we call “mission-critical facilities.” That means they’re headquarters, labs, or research and development centers. Plus, a whopping 68% of our tenants either have investment-grade ratings or are close to it, which we think keeps our rental income steady and lowers the risk of tenants defaulting. And hey, GNL has a pretty solid track record when it comes to renewing leases. So, even though some leases might be ending soon, there’s not much risk of places sitting empty.

But here’s the thing: When your debt compared to your earnings is in that range, even a few vacancies can put a lot of pressure on you.

Looking ahead to 2024,

we’re expecting the adjusted funds from operations (AFFO) to be around $1.35.

Image source; seekingalpha.com

 

Here’s the funny part: Even though most analysts are predicting the funds from operations (FFO) to be around $1.10 per share, there’s a bit of a disconnect. Usually, analysts don’t stray too far from management’s guidance. But here’s where the mix-up happens: GNL is talking about adjusted funds from operations (AFFO), while analysts are sticking with FFO. Now, in most real estate investment trusts (REITs), AFFO tends to be lower than FFO.

But here’s the kicker: There’s no set definition of AFFO in the US (though Canadian REITs are more consistent about it). Generally, AFFO involves trimming down the FFO by taking out maintenance capital expenditures and straight-line rent adjustments. Now, in GNL’s case, as we saw in Q4-2023, AFFO ended up being way higher than FFO. And that’s where the confusion kicks in for investors, not so much for analysts.

 

Image source; seekingalpha.com

 

GNL is sticking to its guns, expecting a similar gap for the entire year 2024. Now, we’ll let you folks decide which measure of owner’s equivalent earnings is the real deal, but those “one-time” adjustments seem to be becoming a regular thing for GNL.

Here’s our take:

GNL believes hitting a 15 times adjusted funds from operations (AFFO) multiple is doable. We’re playing it safe with our strategy for paying off debt, aiming to keep our earnings steady while hoping to see our net debt to adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) drop by about 1 full turn. Crunching the numbers, if we apply a reasonable 10 times AFFO multiple to our per-share guidance, it puts our stock price over $13 a share, or even up to $20 a share if we’re at the high end of the sector with a 15 times AFFO multiple.

Now, let’s be real here. When you’ve got companies like W. P. Carey Inc. (WPC), Agree Realty Corporation (ADC), and Realty Income (O) trading at an average of 13 times funds from operations (FFO), we’d be looking at paying roughly 7 times FFO for GNL if we suddenly hit the jackpot, or 5 times before that. And just to clarify, we’re talking about FFO, not that fluffed-up adjusted stuff. So, at $7.50 a share (assuming we haven’t hit the jackpot yet), GNL might seem a bit pricey. Plus, with the new dividend set at $1.10, it’s pretty much using up all the expected FFO. Sure, there’s talk of various synergies boosting up the FFO, but investors should really keep an eye on the fact that the weighted average interest rate is still stuck in the zero-interest rate policy (ZIRP) era.

Image source; seekingalpha.com

 

If there’s any significant repricing of this situation over the next three years, it could spell trouble for the company. Some investors might think we’re playing it too safe, but let’s just stick to the facts here. We’ve seen the most significant easing of credit conditions since the global financial crisis came to a close. Yet, despite all that, GNL’s short-term bonds are yielding a hefty 8.35% until maturity. That’s saying something.

Image source; seekingalpha.com

 

GNL is indeed keeping up with paying the coupon rate on those bonds. But let’s take a moment to think about what would happen if we were to reprice this whole situation to, say, 7.2% from the current 4.8%. That’s a whopping 50% increase, but honestly, it’s a pretty fair assumption unless we suddenly go back to the zero-interest rate policy (ZIRP) days. And the truth is, it’s not all that difficult to find or calculate. Just take a look at the interest expense from Q4-2023, and you’ll see what I mean.

Image source; seekingalpha.com

That’s right on the money. If we’re talking about a 50% increase, that’s roughly $42 million. Now, if you take that hefty chunk out of the existing funds from operations (FFO), well, you’re not exactly swimming in cash afterward. It’s a significant hit, no doubt about it.

Image source; seekingalpha.com

Here’s the bottom line: Even though that reset is a long way off, everything we’ve seen indicates that GNL’s fundamental earnings base is likely to decline gradually over time. So by the time we hit that 2027 maturity date, things might look even bleaker. GNL really needs to buckle down on reducing its debt, and according to Fitch, that might mean selling off assets and slashing funds from operations (FFO).

Now, let’s talk about those preferred shares. Surprisingly, they’re actually trading higher than when we last talked about them. They’re yielding around 8.3% collectively, which might seem appealing. But hear us out: We think they’re carrying a much higher risk than that yield suggests. You see, there are safer bets out there that can still net you a 7%-8% yield over a 5-7 year span without the same level of credit risk. With GNL, the risk is higher than what their credit rating implies, in our opinion. So that 8.3% yield? Not cutting it. If we were talking about 10%-12%, that might be a different story. But for now, we’re downgrading all those preferreds to a “Sell.”

Now, just a friendly reminder: This isn’t financial advice, despite what it might sound like. Investors need to do their own homework and talk to a professional who knows their stuff. If you’re after real yields that can help reduce portfolio ups and downs, maybe our Conservative Income Portfolio or Enhanced Equity Income Solutions Portfolio could be worth checking out. Plus, there’s currently a discount on annual memberships, and new members get an 11-month money-back guarantee. It’s something to think about.

Image source; seekingalpha.com

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