Over the past five years, REIT investing has undergone significant transformations. Historically low interest rates following the Great Recession era led to a prolonged decrease in capitalization rates, paralleling a long-term drop in treasury yields.
This environment provided a strong tailwind for real estate investors, especially benefiting net lease REITs, which thrived due to their long-duration lease agreements.
Challenges in the Net Lease Sector
However, the prosperity of net lease REITs has been uneven, with some REITs faring better than others.
These REITs are particularly sensitive to interest rate changes due to their reliance on fixed cash flows from long-term leases.
Although the sector enjoyed a period of valuation expansion, the rising tide of interest rates has started to reverse these gains.
Global Net Lease (NYSE: GNL), for example, has struggled significantly despite the favourable conditions of the past.
The company has faced issues like increased debt, dividend cuts, and management changes, which have collectively contributed to its underperformance. Since the beginning of the year, GNL’s stock has plummeted by over 33%.
Global Net Lease’s Operational Struggles
Global Net Lease owns a vast portfolio of properties under long-term triple net leases, which ideally offers protection against rising costs.
Despite this, GNL’s performance has been lackluster, with key financial metrics deteriorating. The company’s debt levels are concerning, with a high net debt to adjusted EBITDA ratio of 8.4x.
In comparison, more successful peers like Agree Realty (ADC) boast much healthier financial ratios.
Dilutive Acquisitions and Financial Management
GNL’s recent history includes acquisitions that have not only failed to deliver but have also been dilutive to shareholder value.
The company’s weighted average cost of capital (WACC) has not been met by these investments, signaling poor strategic decisions.
Furthermore, management’s efforts to address these issues, such as acquiring other REITs and internalizing management, have not yet proven effective.
Dividend Performance and Investor Expectations
A critical aspect of net lease REITs is their dividend performance. Unlike industry leaders who have consistently increased their dividends, GNL has had to cut its payouts multiple times.
The recent dividend cut to $0.275 per share represents a continuation of this disappointing trend, reflecting the company’s declining AFFO per share.
Valuation and Market Perception
Despite GNL’s low valuation relative to its peers, the market has heavily discounted its shares due to ongoing financial struggles and poor management execution.
While the low AFFO multiple could suggest a buying opportunity, the underlying fundamentals and management challenges dampen the investment appeal.
Alternative Investment Opportunities
For investors seeking more reliable returns within the REIT sector, there are better alternatives than GNL.
The Cohen & Steers REIT & Preferred Income Fund (RNP) is one example, offering a diversified portfolio that has consistently outperformed GNL and provided stable dividends.
This fund represents a more attractive option for those looking to invest in real estate without taking on the significant risks associated with Global Net Lease.
A Risky Bet
While GNL presents a discounted investment opportunity, its numerous challenges and uncertain future performance make it a risky bet.
Investors should consider alternative REIT investments that offer better growth prospects, stable dividends, and more robust financial health.
As the real estate market continues to evolve, focusing on quality and proven track records will be crucial for achieving long-term investment success.
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Kris is a finance consultant, content marketer, and speaker specializing in helping brands and business owners navigate complex concepts and decisions. Since earning her Finance and Accounting degree, Kris has spent over half a decade writing about financial and technological concerns of brands spanning different life cycles.
