2 more attractive priced REIT preferences up to 8% return – Global Net Lease, Inc. (NYSE: GNL)

Source

Today, we emphasize two preferred stocks that income investors should consider buying and keeping as a long-term, defensive measure in what we looks like a flat to falling interest rate environment over the next few years.

In a previous article, we explained the decisive role that fixed income securities play in protecting revenues during a recession.

"Interest has only one way to go in this type of environment, and it is down. When economic growth slows, it becomes more difficult to rely on income gains."

GDP came to 3.2% in 2011, we see growth slowly for the rest of the year, and we expect the Federal Reserve to keep prices flat.

Source: CNBC 10-year dividend

Despite the peak up in the year 2018, during the past year the general interest rate level has declined.

Our goal is to find preferred stocks that are issued by companies that have strong and stable cash flow that we expect more than to cover the preference share dividend, even in the event of a recession. Locking high dividends will provide significant income protection, and it is important to move into fixed income securities before the market rushes into them and pushes up the price. Today, it is becoming increasingly difficult to find attractive prices for preferred stocks, bonds and fixed income products, we are always looking for affordable opportunities. Every week we scan the interest rate plan and share the best opportunities with our investors.

Real estate in particular tends to produce significant cash flows, even in a recession. In periods of flat to falling prices, REITs perform particularly well as cheaper loan costs improve their delivered returns. As we described in a recent article:

REITs come as an ideal part of the structure of a portfolio that wants stable income through a recession, but will continue to upside in an environment where interest rates are lower. "

In addition, the REIT structure is designed for cash flow, with tax rules requiring them to distribute 90% of their taxable income, which gives preferred shareholders an extra layer of income security.

We have been able to find some quality Offers With More Than 7% And Still Trade At Attractive Valuations. These dividends are unlikely to last, and it is important that we position our portfolio before it is a market for security in the market, while there is some potential for preferred stocks. To experience capital gains, our main goal is to unlock today's high returns to preserve income over a longer period of lower interest rates and market volatility.

The two companies we will be focusing on today:

• Global Net Lease (GNL)
• Landmark Infrastructure Partners (LMRK)

Global Net Lease

Global Net Lease there and triple net lease REIT. GNL has $ 3 billion in real estate, spread over 7 countries, which is 99.2% leased. GNL uses long-term leases with a weighted average remaining lease term of over eight years. In addition, over 78% of their tenants are investment class or equivalent, and 92% of the lease has contract rent increases, so even in a recession, the rent will continue to rise .

When it comes to a real estate base, GNL has what we are looking for: stable real estate brokerage with quality tenants, organic growth and long-term leases.

Source: GNL

Many REITs like commerce are overwhelmingly American centric. GNL helps provide some spread with 44% of rental rates from European countries. Geographic diversity helps to limit the impact of local economy.

In the case of tenants, GNL actually beats equals as Realty Income (O) or National Retail Properties (NNN).

Source: GNL

Its top ten tenant list is a good example of the diversity found in the GNL portfolio. It is diversified by country, property type and industry, and the one thing that all these companies have in common is a credit rating of investment class. These are exactly the kind of quality properties and tenants we want to secure our investment.

External Management

The most common criticism of GNL is that it is remotely controlled. External management means that the managers are not employed by REIT, they are contracted by REIT and usually have other business interests. GNL is managed by AR Global, a company currently managing four REITs, including the American Finance Trust (AFIN).

Externally managed REITs generally have poor reputation and discount trading for their internally managed peers. One of the main reasons for this bad reputation is that the REIT leaders are often rewarded for assets under management, or AUM, which stimulates leaders to increase REITs bigger and not necessarily worry about the share price of the common equity. This may cause them to issue common equity at prices that are less than attractive and diluted common shareholders.

This is one of the reasons why we would not consider GNL shares. We have already seen evidence of common shareholder dilution, as GNL issued 4 million shares in August of $ 20.65 / share and then issued another 7.7 million shares in Q1 2019 through its ATM at an average of 19.69. dollar / share.

While this is a good reason to avoid common equity and worry about the usual dividend being cut, these actions are positive for the preferred equity. The reason for this is that the common capital cannot collect a penny in dividend until the preferred equity has been paid dividend it is entitled to in full.

Based on preferred equity, the company collected over $ 160 million, which will be funded in future acquisitions. These acquisitions will pay rent and will also increase the asset base. The common equity that pays for the acquisitions has no rights to cash or assets of after the preferred equity is paid.

Management's willingness to issue joint capital to dilutive prices may conflict with common shareholder interests, but it aligns it with the interests of the preferred equity.

Preferred Coverage

In order to determine how safe the proceeds of the preferred shares are, and thus whether it has the potential to be a good investment, looking at the relationship between AFFO with interest expense and preferred share dividends has to be restored to the relationship between the sum of the interest cost and the preferred dividend. The table below gets these values ​​from the last 10-K and calculates a ratio.

Source 10-K and author's calculations

The coverage ratio for 2018 was just over 3.5x . GNL had over $ 100 million in cash by the end of 2018 and increased another $ 80 million through its ATM in Q1 2019. These funds will be distributed in the first half, increasing AFFO.

Another Important Factor in Determining the Security of Investing in the Preferred Stocks is to look at the relationship between net equity and the redemption value of outstanding preferential shares. The idea was that if the company liquidated, how much money could it produce in relation to what is needed to make the preferred shareholders the whole.

] GNL 2018 10-K

] As shown in the table above (from the last 10-k), GNL assets have valued at a net of around NOK 1.4 billion. To redeem the approx. 5.4 million preferred shares will outstanding claim ~ $ 135.4 million. The current net value of their assets is approximately 10.55 times the amount needed to redeem the preferred shares.

In relation to debt, GNL primarily uses non-repurchased mortgages. The $ 1.1 billion mortgage loan is a series of loans secured by specific properties. If GNL is standard, the lenders have nothing new to the company. This helps to isolate the company and its other assets in the event that localized value decreases. For all properties that sell for more than the home loan, only the revolving facility and the term loan will have preferential rights to excess over the preferred stock.

Option: GNL.PA

Global Net Lease 7.25% Series A Cumulative Soluble Preferred Stock (GNL.PA) is currently trading at $ 25.42. The call date is over 3 years away, and GNL provides significant cash flow coverage, as well as net asset coverage over 10.55x . Any price below $ 25.60 will lock a return of over 7.1%.

Landmark Infrastructure Partners

Landmark Infrastructure has a unique business model where it leases land to tower companies, outdoor advertisers and renewable energy companies.

Source: Landmark

By owning the underlying country, but having little LMRK upholds incredibly long operating margins of 98% without a maintenance kit.

Source: Landmark

LMRK's revenues are well diversified and tenants are very recognizable names with national footprints.

If there are solar panels, a tower or a visible advertising space, the tenants have made considerable approx. investments that are difficult to move and are strategically important to the tenant. That is why LMRK has a 99% renewal rate on the lease. Including extension options, LMRK's average lease agreement has been for 22 years . When it is in the tenant's interest to contractually guarantee several decades of lease rights, it creates a lot of predictability and stability for the landlord.

Almost no cap ex, lease agreements measured for decades, and high quality tenants with national footprints all add up to a business model that will provide significant stability in all economic circumstances.

While Landmark is planning to convert to a REIT in the next 2-3 years, it hasn't done so yet. As an MLP, it still issues a K-1, but it is a very simple form of preferred problem.

Preferred Coverage

]

Landmarks report a non-GAAP metric called the Distributable Cash Flow (DCF) that takes out many of the same things that FFO removes. It can be used to display a coverage ratio for the preferred landmark issues. So the DCF plus the interest cost and payment of the preferred entities divided by the sum of the interest cost and the payment to preferred entities provides coverage on 1.96x . Landmark generates almost twice as much money as is needed to make its payments to its bondholders and preferred shareholders.

The coverage is not as great as for GNL; But with the inherent stability of LMRK's revenue and the much lower cap-ex requirements, coverage provides a comfortable pillow. ” width=”406″ height=”123″ data-width=”406″ data-height=”123″ data-og-image-twitter_small_card=”false” data-og-image-twitter_large_card=”false” data-og-image-twitter_image_post=”false” data-og-image-msn=”false” data-og-image-facebook=”false” data-og-image-google_news=”false” data-og-image-google_plus=”false” data-og-image-linkdin=”false”/>

  Source:   LMRK 10-K  
 
  As for net active coverage, LMRK has $ 155 million on its revolving line of credit and $ 223,685 million in secured notes as sole debt. With $ 143.5 million in outstanding pre-emptive shares, the net property coverage over  is 2.35x . 
 
  With property holdings consisting mainly of land as opposed to buildings, there is less volatility in property values. LMRK does not enjoy the large coverage figures for GNL, but is compensated by the lower risk and the inherent stability of LMRK's business model. 
 
  Opportunity: LMRKP 
 
 
  Landmark Infrastructure Partners 8.00% Series A Cumulative Soluble Perpetual Preferred Units  (LMRKP) trades for $ 25.15. A return of over 7.75% can be locked into any  price below $ 25.80 . 
 
  Landmark also has another preferred stock that we like which is  Landmark Infrastructure Partners 7.90% Series B Cumul Red Perp Preferred Units  (LMRKO) and provides roughly the same as LMRKP. Investors can choose one depending on which one gives the most at the time of purchase. 
 
  Conclusion 
 
  We like to invest in preferred shares of companies that are landlords. These companies, especially when organized as REITs, have highly predictable cash flows, giving very safe preferred share dividends. Both Global Net Lease and Landmark Infrastructure Partners are landlords, although Landmark has not converted to a REIT (it plans to do so in the near future). 
 
  The preferred shares are secured by the stable cash flow, which can reasonably be expected to continue in tough economic conditions. Both companies have a solid base of underlying assets, high quality tenants and long-term leases. This is exactly the kind of stability we look for with preferred equity investments. 
 
        
 
  Comparison of the two, GNL.PA has superior cash flow and real estate coverage; However, it also has a significantly lower return. Due to the stability of the business model and assets, we believe that LMRKP is a good opportunity, and cash flow and capital adequacy are enough to provide solid security for preferred investors. 
 
  Both investments have a place in a well-diversified preferred portfolio, and both will provide stable income in an economic downturn. GNL.PA is a  purchase under $ 25.50  and LMRKP is a  purchase below $ 25.80 . 
 
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  Notice:    I am / we are long GNL.PA, LMRKO, LMRKN .    I wrote this article myself, and it expresses my own opinions. I do not receive compensation for it (other than from Seeking Alpha). I have no business relationship with a company whose stock is mentioned in this article.