Sometimes an investment option sounds like a great idea until you dig in and see that the negatives outweigh the positives. That's the case with Global Net Lease (NYSE: GNL). However, if you like the positive attributes here, you can still get them, but you'll need to buy a different real estate investment trust (REIT). Here's why W.P. Carey (NYSE: WPC) is a better buy than Global Net Lease.
Similar in many ways
Global Net Lease and W.P. Carey both use the net lease approach. That means they own single-tenant properties, but tenants are responsible for most of the operating costs of the assets they occupy. Simplified, these REITs just sit back and collect the rent. It's generally considered a low-risk investment approach in the real estate sector.
In addition, both Global Net Lease and W.P. Carey are heavily diversified within their portfolios. Global Net Lease's portfolio breakdown is 46% office, 49% industrial/distribution, and 5% retail. W.P. Carey's mix is 47% industrial/warehouse, 23% office, 18% retail, and 5% self-storage (the remainder falls into a broad "other" category). There are clear differences between the two portfolios, but there's a healthy mix of property types at both.
And, most notable because it's in the REIT's name, Global Net Lease generates roughly 36% of its rents from outside of the United States. That figure at W.P. Carey is 39%. Both are heavily focused on Europe. The global nature of their portfolios sets each of these REITs apart from most of their competitors.
At this point, there are more similarities than differences between Global Net Lease and W.P. Carey. Where things start to separate out, however, is important.
The big differences
For example, Global Net Lease is externally managed by AR Global Investments. This company oversees other public REITs, so it's fair to wonder if Global Net Lease is getting as much attention as you might want it to as a shareholder. There's also the risk of conflicts of interest, since the compensation in the contract between AR Global and Global Net Lease could push the manager to do things that are in its best interests (to boost its pay, for example) even if they aren't in your best interest as a shareholder. This risk factor actually gets its own section in the 10-K. W.P. Carey, by contrast, is internally managed, so there's no equivalent concerns.
For most income-focused investors, however, the most notable disparity will be on the dividend front. Global Net Lease yields a hefty 8.4% compared to W.P. Carey's 5.9%. However, Global Net Lease cut its dividend 25% in 2020, while W.P. Carey increased its dividend each and every quarter during the pandemic hit year. It increased it again in the first quarter of 2021. W.P. Carey has now increased its dividend every year since its initial public offering in 2018. Clearly, one of these REITs is in a better position dividend-wise.
Which brings the story to the coverage ratio. Despite the headwinds in 2020, W.P. Carey's adjusted funds from operations (FFO) coverage ratio last year was 88%. That's a little high but not out of bounds in the net lease space. Even including the dividend cut, however, Global Net Lease's adjusted FFO coverage ratio in 2020 was 97%. In fairness, 2020 was a difficult year, but it's clearly not a good sign when a REIT has to cut its dividend and still has a payout ratio of nearly 100%. Given that backdrop, it's not surprising that the yield is elevated today.
Similar, but different
There are other nuances here that could be examined, but these three main differences between these two net lease REITs should be enough to get most investors to favor W.P. Carey. Yes, you could increase the income your portfolio generates by adding Global Net Lease, but then you'll be taking on the external manager issue, a less-consistent dividend history, and a company with a relatively high payout ratio. A few extra percentage points of yield probably isn't worth the added risk for most investors.