Global Net Lease, Inc. is a US$1.6b small-cap, real estate investment trust (REIT) based in New York, United States. REIT shares give you ownership of the company than owns and manages various income-producing property, whether it be commercial, industrial or residential. The structure of GNL is unique and it has to adhere to different requirements compared to other non-REIT stocks. Below, I'll look at a few important metrics to keep in mind as part of your research on GNL.
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Funds from Operations (FFO) is a higher quality measure of GNL's earnings compared to net income. This term is very common in the REIT investing world as it provides a cleaner look at its cash flow from daily operations by excluding impact of one-off activities or non-cash items such as depreciation. For GNL, its FFO of US$145m makes up 65% of its gross profit, which means the majority of its earnings are high-quality and recurring.
GNL's financial stability can be gauged by seeing how much its FFO generated each year can cover its total amount of debt. The higher the coverage, the less risky GNL is, broadly speaking, to have debt on its books. The metric I'll be using, FFO-to-debt, also estimates the time it will take for the company to repay its debt with its FFO. With a ratio of 8.1%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take GNL 12.28 years to pay off using just operating income, which is a long time, and risk increases with time. But realistically, companies have many levers to pull in order to pay back their debt, beyond operating income alone.
I also look at GNL's interest coverage ratio, which demonstrates how many times its earnings can cover its yearly interest expense. This is similar to the concept above, but looks at the upcoming obligations. The ratio is typically calculated using EBIT, but for a REIT stock, it's better to use FFO divided by net interest. With an interest coverage ratio of 2.49x, GNL is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.
In terms of valuing GNL, FFO can also be used as a form of relative valuation. Instead of the P/E ratio, P/FFO is used instead, which is very common for REIT stocks. GNL's price-to-FFO is 11.24x, compared to the long-term industry average of 16.5x, meaning that it is undervalued.
As a REIT, Global Net Lease offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in GNL, I highly recommend taking a look at other aspects of the stock to consider:
- Future Outlook: What are well-informed industry analysts predicting for GNL’s future growth? Take a look at our free research report of analyst consensus for GNL’s outlook.
- Valuation: What is GNL worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether GNL is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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