Global Net Lease: Unease Despite Essential Retail Merger

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Global Net Lease, Inc. (NYSE:GNL) stock dropped over 10% due to a merger announcement. This happened as REITs lost popularity lately.

Shares reacted strongly to the acquisition of The Necessity Retail REIT, Inc. (RTL). Let's look at the base case to understand why.

Expanding Across The Globe

Global Net Lease, Inc. has many properties in North America and Europe. They have many tenants in different industries. They are almost full, and their contracts allow for rent increases, so they can handle higher interest rates.

The portfolio has 60% of the properties in North America, and the rest are in Europe, mainly in the UK. More than half of the properties are industrial and distribution, but 40% are offices. Big tenants like FedEx, Whirlpool, and ING are there, and McLaren Automotive is the biggest tenant.

In 2022, Global Net Lease made $379 million from tenants. This is less than the previous year, but more in constant currency. They had a small GAAP loss because of interest expenses, depreciation expenses, and preferred stock dividends. Adjusted Funds From Operations, or FFO, was $173 million or $1.67 per share, which is the same as before.

The company has $4.0 billion in assets. It has $3.6 billion invested in real estate. This is the biggest part of their investments. But they only have $1.4 billion in money invested in the company. This is a problem because they don't have much money to fall back on if something goes wrong. Each share in the company is worth about $13 according to their books. Recently, shares have been worth only $10 each.

The discount is $3 per share which equals $300 million. The investments are actually worth $3.3 billion, not $3.6 billion. The cap rates are above 10% due to high expenses related to some buildings. The company is not profitable when using GAAP.

Investors got $1.60 per share in dividends which is a high yield. But, it's better to focus on lowering debt instead. Dividends are almost the same as FFO, which means less cash for investing.

In 2015, Global Net Lease stocks cost $25. Over time, they decreased to $20 before the pandemic. They did not fully bounce back and were valued at around $15 after the pandemic. Recently, the stocks have gone down to around $10 in late 2022 and again in 2023.

Global Net Lease, Inc. made $94.3 million in the first quarter of May. It was 3% lower than last year. They lost six cents, where they made five cents last year. Adjusted FFO went down by five cents, making it $0.38 per share. The results were not as good as expected.

Rent isn't growing despite some small deals, and currency problems happen sometimes. However, costs like interest keep going up.

The REIT company faces challenges. They plan to merge with The Necessity Retail REIT. The deal is complicated. It's an all-stock merger. RTL is worth $7.08 per share, 35% more than before.

After the deal, those who invested in GNL will own 45% of the shares. Meanwhile, shareholders of RTL will receive 39% of the shares in an exchange ratio of 0.670. The owners of the old external manager of the RTL assets will get 17% of the shares, but these activities are now internalized.

The Necessity Retail REIT has 1,000+ properties and is 28 million sq ft. Most of the properties are retail, making up 90%. Their average size is smaller than Global Net Lease. The retail segment isn't inspiring, but it makes up for the office component. Their straight-line rent is in line with their business in dollars.

The company thinks they can save $75 million by combining. It includes $21 million from merging things and cutting costs, and $54 million from managing things themselves.

The dividend will drop to $1.42 per share because of a deal, but that's still high compared to the $9 per share price. The shares went down over $1, or more than $100 million in total. Global Net Lease investors own just 45% of the stock, even though rent income for both companies is similar.

Global Net Lease, Inc. shares are cheap, but the move seems weird. It's a tough 2022 and shares are valued below book value. However, the company still focuses on higher dividends, which is odd. If this is a discount, lower dividends and share buybacks would be better for investors. The Necessity Retail REIT deal is strong for strategy, except to grow and decrease office exposure.

I think it's not wise to invest in Global Net Lease, Inc. The company is facing difficulties. There are problems with operations. REITs are not doing well. They have high dividend payouts. A merger is pending which poses uncertainty. Considering all this, it's best to avoid investing at current levels.

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