FNNNF - Global Net Lease Preferred: High-Yielding Cumulative With Payouts Covered

Summary

• Global Net Lease, Inc.’s focus on premium office & industrial properties, strong and credible tenant base, high occupancy levels, and longer lease terms ensure steady earnings.
• Global Net Lease's strong operating performance generates enough funds from operations in order to cover its preferred dividends. The same can’t be said about its equity dividends.
• Global Net Lease preferred shares are trading at a low price, recorded a 3-year yield of 5.8 percent, and dividends seem almost guaranteed, more so due to its cumulative nature.

~ by Snehasish Chaudhuri, MBA (Finance).

Global Net Lease, Inc. 6.875% PFD SER B ( GNL.PB ) is a preferred stock series issued by Global Net Lease, Inc. ( GNL ). This preferred series is currently trading at $19.93, and has a market capitalization of $1.33 billion.

This real estate investment trust ("REIT") issues new shares very often, which can create a potential yield trap. However, preferred shares of this company are in a position to generate almost guaranteed return, as the funds from operations ((FFO)) are much higher than the preferred dividends payable. Moreover, preferred shares enjoy additional layers of security, as they rank senior to the common shares and the preferred dividends are also cumulative in nature. Investors also find GNL.PB attractive due to its strong preferred dividend coverage ratio.

Global Net Lease, Inc. Has Good Operating Performance, But There Are Risks

Global Net Lease's industrial properties include facilities spanning medical processing, manufacturing, cold storage, airplane repairing, and many other distributions related infrastructure. GNL's office portfolio consists of net leased commercial spaces at central business districts ("CBD") that are let out to single tenant occupants. The company's client base is boasted of globally reputed business houses such as FedEx Corporation ( FDX ), Whirlpool Corporation ( WHR ), Finnair Oyj ( FNNNF ), ING Groep N.V. ( ING ), Golden Star Acquisition Corporation ( GSA ), etc. At present, this REIT has more than 100 clients, with long-term lease agreements and committed rent increments.

I covered GNL during May, 2022, and found that its focus on premium office and industrial properties, strong tenant base, consistently high occupancy levels, and long lease terms ensure steady earnings for this REIT. However, GNL has its own shares of challenges in the form of low capital investments. In the same article, I also opined that

"Being a small-cap diversified REIT with a market capitalization of only $1.42 billion , it (lack of capital investment) does cause concern over its long-term sustainability due to its limitation in raising external debts. In absence of capital expenditure, either through retained earnings or external debt, this REIT will not be able to generate a similar level of revenue growth, which will ultimately impact its earnings and FFO."

Preferred Investors Are In A Better Position And Almost Guaranteed Payout

An interesting thing to note is that, GNL's FFO is not constant. During the past 20 quarters, quarterly FFO per share has ranged between $0.29 and $0.54. And it's not about one or two quarters, if we calculate the average FFO in those 20 quarters, it'll come to $0.42. At the same time, the quarterly payout has ranged between $0.4 and $0.71. This clearly implies that the equity dividends are not fully covered, though the REIT has generated substantial FFO. However, when it comes to the preferred dividend, the risk is almost negligible. Global Net Lease has trailing-twelve months ( TTM ) FFO of approximately $187 million, while its TTM preferred dividend is $21 million. Moreover, this FFO is derived after deducting preferred dividends.

The company has a strong operating performance and generates enough FFO in order to cover its preferred dividends, which can be easily concluded from the above figures. So, preferred investors can be rest assured of their annual dividend. On top of that, a falling price of GNL.PB makes its yield furthermore attractive. While GNL.PB's price fell by almost 26 percent, it recorded an annual average yield of 7.45 percent in 2022. Over the past 3 years, the annual average yield was almost 5.8 percent, which is less than its coupon rate. So, there is no reason why this current level of yield can't be sustained.

Preferred Shares Are More Attractive Due To Additional Layers Of Safety

Global Net Lease, Inc. 6.875% PFD SER B is cumulative in nature and pays dividends at a fixed rate. As a result, there is negligible chance of defaults in payout, as unpaid dividends get paid in the consecutive years. This preferred series also has a short Interest of 2.28 percent, which I believe is acceptable. Short Interest measures the percentage of shares investors have sold short and remain outstanding. Traders short-sell any investment security when they anticipate that price may decline in the coming months. This, in brief, explains the level of investors' pessimism towards a certain stock.

In the month of May, I found that:

"Global Net Lease is generating good revenue and earnings, and is thus paying a 10+ percent dividend. A high concentration in office and industrial real estate properties, strong tenant base, consistently high occupancy levels, and long lease terms will thus drive long-term value for GNL's shareholders."

However, this diversified REIT has a very high payout of 90 percent. So, therein lies a question about sustainability of equity dividends. On the other hand, preferred dividends seem almost guaranteed, more so due to their cumulative nature. And as the preferred series is trading at a low price, I believe this is an opportunity to buy Global Net Lease, Inc. 6.875% PFD SER B.

Investment Thesis

Global Net Lease, Inc. is a diversified REIT that invests primarily in office and industrial properties located in developed markets throughout the globe. The company's client base boasts globally reputed tenants with investment grade credit ratings. Most of its businesses are conducted through long-term lease agreements that also include committed rent increments. Most of its properties are occupied all the time. All these ensure steady earnings for this REIT. However, the REIT has its own shares of challenges in the form of low capital investments. The equity dividends are also not fully covered.

But, when it comes to preference dividend, the risk is minimal. Global Net Lease, Inc. has a strong operating performance and generates enough FFO in order to cover its preferred dividends. A falling price makes this preferred series furthermore attractive. Over the past 3 years, the annual average yield was less than its coupon rate. So, there is no reason why this current level of yield can't be sustained.

These preferred payouts seem almost guaranteed, more so due to their cumulative nature. And as the preferred series is trading at a low price, I suggest accumulating Global Net Lease, Inc. 6.875% PFD SER B shares at the current price.

For further details see: