Weak Office Demand Will Depress Rents But Enable Recovery

Key Takeaways

• Secular shifts toward remote work and higher interest rates threaten occupancy, rent growth, and property values for GNL's office-heavy portfolio despite recent balance sheet improvements.
  
• Exposure to outdated office and retail assets, mounting need for ESG upgrades, and a low share price may constrain future growth opportunities and compress operating margins.
  
• Elevated office exposure, high leverage, and limited sector diversification heighten vulnerability to market shifts, financial risk, and earnings volatility, potentially restraining long-term growth.

Catalysts

A publicly traded real estate investment trust listed on the NYSE, which focuses on acquiring and managing a global portfolio of income producing net lease assets across the United States, United Kingdom, and Western and Northern Europe.

• Although GNL has made substantial progress in strengthening its balance sheet by reducing leverage, extending debt maturities, and achieving investment-grade ratings on senior notes, the ongoing secular decline in demand for office properties due to the entrenched shift toward remote and hybrid work could erode occupancy and suppress rent growth for GNL's office-heavy portfolio, directly impacting long-term revenue and net operating income.
  
• While GNL now benefits from enhanced liquidity of over $1 billion and increased balance sheet flexibility through refinancing and asset sales, higher-for-longer interest rates remain a persistent risk, which could raise future refinancing costs, pressure property values, and weigh on earnings and net margins despite near-term improvements.
  
• Even as GNL's strategic focus on single-tenant net lease assets and a diversified European footprint insulates it from certain cyclical risks and supports a more stable revenue stream, the company still faces substantial long-term exposure to legacy office and retail properties in secondary markets where secular declines could drive higher vacancy and lower renewal spreads, ultimately constraining rental income growth.
  
• Although the portfolio boasts 98% occupancy and a high share of investment-grade tenants, the accelerating need for sustainable, ESG-compliant buildings may require significant capital expenditures to retain key tenants, threatening to increase operating expenses and compress net margins over time if GNL's legacy properties fall behind evolving standards.
  
• While consolidation in the REIT sector should create opportunity for GNL to benefit from scale and acquisition-driven growth, GNL's persistently low share price and ongoing discount to net asset value may limit its capacity to raise equity capital for such accretive opportunities, ultimately restricting its ability to drive future earnings and revenue expansion.

Global Net Lease Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Global Net Lease compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Global Net Lease's revenue will decrease by 20.7% annually over the next 3 years.
• The bearish analysts are not forecasting that Global Net Lease will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Global Net Lease's profit margin will increase from -33.4% to the average US REITs industry of 20.3% in 3 years.
• If Global Net Lease's profit margin were to converge on the industry average, you could expect earnings to reach $79.9 million (and earnings per share of $0.4) by about August 2028, up from $-263.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 26.7x on those 2028 earnings, up from -6.3x today. This future PE is greater than the current PE for the US REITs industry at 24.9x.
• Analysts expect the number of shares outstanding to decline by 3.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.02%, as per the Simply Wall St company report.

Global Net Lease Future Earnings Per Share Growth

Risks

• Elevated exposure to office assets, which still represent 27% of the portfolio, leaves GNL vulnerable to continued secular declines in demand for office and commercial real estate due to remote and hybrid work, increasing long-term vacancy risk and pressuring renewal rates, ultimately impacting rental revenue and net operating income.
  
• The company's significant overall leverage, even after improvement, remains high at a net debt to adjusted EBITDA ratio of 6.6 times, raising concerns over financial flexibility and interest expense levels, which could be exacerbated if interest rates remain elevated or refinancing becomes more costly, thereby reducing net margins and future earnings potential.
  
• GNL's transition into a pure-play single-tenant net lease REIT-while simplifying the portfolio-limits sector diversification and heightens exposure to sector-specific risks, including cyclical headwinds or tenant instability in areas such as auto manufacturing and office, which could suppress long-term rental growth and lead to increased earnings volatility.
  
• Persistent discount to net asset value and weak share price performance have not improved despite deleveraging and operational progress, constraining GNL's ability to raise low-cost equity capital for future growth initiatives or acquisitions, which could stagnate revenue and earnings growth prospects over the long term.
  
• The necessity of ongoing capital expenditures to keep assets competitive and meet evolving tenant and ESG requirements, combined with possible regulatory changes or technological disruptions in real estate usage, could increase operating costs and reduce occupancy, thereby putting downward pressure on both revenue and profitability.

Valuation

• The assumed bearish price target for Global Net Lease is $8.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Global Net Lease's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $12.0, and the most bearish reporting a price target of just $8.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $393.8 million, earnings will come to $79.9 million, and it would be trading on a PE ratio of 26.7x, assuming you use a discount rate of 10.0%.
  
• Given the current share price of $7.47, the bearish analyst price target of $8.0 is 6.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.