The Third Stock That Could Go Bankrupt in 2024

Real estate investment trusts ("REITs") have been in the news for months... and for all the wrong reasons.

REITs buy buildings and then lease out that space to businesses. They might own apartment buildings, hotels, offices, retail stores, cellphone towers, or even hospitals.

For almost any kind of REIT, though, the past two years haven't been kind. Offices and retail stores have faced declining demand... while apartments, warehouses, and data centers have all grown so much that there's a borderline supply glut.

Add to those headwinds a combination of declining asset values, rising interest rates, and looming debt maturities... and many would-be REIT investors are hesitant to dive in.

That includes Global Net Lease (GNL). As its name suggests, the company is a net lease REIT. That means it passes all the costs for operating a property on to its tenants and just reaps a small amount of income for operations.

It sounds like a great business model. Costs aren't on Global Net Lease to incur. They're on the customer. But if the customer starts to struggle, it means Global Net Lease does, too.

Plus, office space and retail make up 68% of Global Net Lease's assets... two parts of the market that are catching the most worrying, distress-related headlines.

The company has a roughly $2 billion market cap and declining prospects. It also has $580 million in debt coming due by the end of 2024.

Thanks to the prior financing environment, the interest rate on those bonds averages a low 3%. When Global Net Lease goes to refinance that debt, though, it'll be looking at a 10.37% yield based on its longer-dated bonds.

And that's not even getting into how the company is taking on another $2.7 billion in debt – including $210 million maturing in 2024 – by buying competitor Necessity Retail REIT.

Global Net Lease is only forecast to generate $159 million in funds from operations for 2023. When it refinances, interest expenses will jump by $60 million. That will set it on the path toward an FFO drop upwards of 20%.

That's all contingent on investors wanting to lend to a headwind-riddled real estate business in the first place.

When it comes to Global Net Lease, our systems are telling us to head for the hills. Its performance and valuations are subpar... and its high-yield credit rating points to looming credit risk.

There's a lot of danger in this REIT. We wouldn't count on it recovering anytime soon.

Regards,

Joel Litman and Rob Spivey
December 3, 2023