Dividend investors are attracted to high yields for a good reason; they mean more income is generated from a portfolio. But extremely high yields need to be taken with a grain of salt, which is the case when you examine Global Net Lease (GNL) and its hefty 14% yield. Here are a few facts that might lead you to pass on this high-yield stock.
Global Net Lease, as its name implies, uses a net lease business model. That means that its lessees are responsible for most of the operating costs of the assets they occupy. The global part of the name refers to the fact that this real estate investment trust (REIT) owns assets in both North America and Europe with a roughly 60/40 split. On top of that diversification, Global Net Lease also invests across asset classes, with industrial and warehouse at roughly 55% of the portfolio, office at 40%, and retail is the remainder. From a big-picture perspective, that’s not a bad story.
Looking a bit deeper, the REIT’s occupancy was a solid 98% in the first quarter of 2023. The average remaining lease was a reasonable 7.8 years. And investment-grade tenants made up roughly 60% of rents. Again, there’s nothing outlandish in any of that. The roughly 310 properties in the portfolio and $1.1 billion market cap make this a relatively small REIT in the net lease space, but that’s not all bad. Indeed, it is easier to grow from a small base.
So why is Global Net Lease’s dividend yield more than double that of peers like W.P. Carey (WPC) and Realty Income (O), which share some rough similarities as globally diversified net lease REITs? For reference, W.P. Carey’s yield is 5.8%, and Realty Income’s is 4.9%.
A list of problems
One of the first things to know is that Global Net Lease is externally managed, while Realty Income and W.P. Carey are internally managed. Investors generally prefer internal management because it reduces conflicts of interest. For example, Global Net Lease’s 10K notes that “The variable portion of the base management fee payable to the Advisor under the advisory agreement increases proportionately with the cumulative net proceeds from the issuance of common, preferred, or other forms of equity by us.” This is an interesting fact.
The graph above shows that the company’s share count has generally headed higher over the past five years. That’s not surprising for a REIT, where tapping the capital markets is a normal part of funding acquisitions. However, notice that the funds from operations (FFO) per share has been heading roughly lower. And then there’s the dividend cut. Clearly, selling more stock has not been a net benefit for shareholders here.
What’s more troubling is the first-quarter 2023 FFO payout ratio. The REIT’s FFO in the quarter was $0.30 per share, and it paid a dividend of $0.40 per share. Paying out more in dividends than you generate in FFO isn’t a sustainable trend. Even when Global Net Lease adjusts FFO to pull out items it considers one-time in nature, the figure only comes up to $0.38 per share — so it still falls two cents short of the dividend. That suggests that another dividend cut isn’t an unreasonable expectation.
So, the end of the story here is that Global Net Lease’s dividend yield is so high because there’s a real risk that the dividend gets cut. And that seems at least partly related to a business structure that isn’t as favorable to shareholders as you can easily find elsewhere, with investments like Realty Income or W.P. Carey.
Not worth the risk
If you are looking at Global Net Lease because of its huge yield, take a step back. A deeper dive here suggests that the huge yield comes with huge risks. And at least some of those risks are fundamental to the way the REIT operates. Most investors will likely be better off with a lower-yielding alternative that has a better track record of putting investors first via dividend growth.