When you visit Global Net Lease‘s (NYSE: GNL) website, the first thing you see is a banner that says “Stable Income.”
That’s referring to the company’s ability to generate income from its commercial tenants. Thanks to a juicy 16% yield, it’s been generating income for shareholders as well… but let’s see whether they can expect to keep receiving that much in the future.
Global Net Lease is a real estate investment trust (REIT) that focuses on commercial properties. It has more than 1,300 properties in the U.S. and Europe across a wide variety of industries. Its top three tenants are automaker McLaren, FedEx and Imperial Reliance.
Since Global Net Lease is a REIT, we look at funds from operations (FFO) when analyzing cash flow.
Last year, Global Net Lease’s FFO took a small dip from $170.4 million to $166.9 million. But the Safety Net model is unforgiving of even the smallest reduction in cash flow. No matter how tiny the reduction, Safety Net will bring down its wrath in the form of a downgrade.
There is some good news, however… This year, due to a merger, the company’s FFO is expected to spike to $261.2 million.
By law, REITs, business development companies and master limited partnerships must pay out at least 90% of their income, so I’m comfortable with a payout ratio of up to 100% for Global Net Lease.
Because of the recent acquisition, the total amount paid in dividends is expected to skyrocket to $303 million in 2023. That seems like great news. But remember, the company’s FFO is projected to be $261 million. That means Global Net Lease will be $42 million short of what it needs to pay the dividend and will have a payout ratio that exceeds 100%.
Lastly, the company recently cut its dividend. In 2020, Global Net Lease reduced its quarterly dividend from $0.5325 to the current $0.40. Now, that was during the pandemic, and commercial real estate suffered more than most sectors. But if Safety Net is unforgiving of a minor decline in cash flow, it most definitely will not be generous toward a dividend cut, pandemic or not.
Global Net Lease has a big dividend that, if the projections for 2023 are even in the right ballpark, will be difficult for it to afford.
The company’s management may consider its income to be stable, but I suspect shareholders soon won’t be able to say the same.
Dividend Safety Rating: D
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