Should you’re seeking to create a million-dollar portfolio, a couple of high-yield shares may enable you get there. International Internet Lease (NYSE: GNL) definitely has a giant yield. However that massive 9.3% yield, when lots of its internet lease actual property funding belief (REIT) friends are yielding nearer to five%, may really be an indication of hassle. This is what it’s good to know earlier than you add International Internet Lease to your rising nest egg.

A barely totally different mannequin

The very first thing to notice about International Internet Lease is in its identify: internet lease. The REIT, like its friends, owns single-tenant properties for which the tenants are answerable for a lot of the working prices of the property they occupy. It is usually thought-about a reasonably low-risk enterprise mannequin.

Simplifying issues a bit, International Internet Lease simply has to sit down again and accumulate rents. And, regardless of COVID-19, it has been doing a reasonably good job of it, with a set charge of 97% within the third quarter. In different phrases, its enterprise is holding up pretty properly within the face of adversity.

However there are some notable variations between International Internet Lease and its friends. For instance, the REIT’s portfolio is damaged down between workplace (48% of rents), industrial/warehouse (47%), and retail (5%). Most different internet lease REITs have a larger concentrate on retail property, with some completely devoted to the sector. Even W.P. Carey (NYSE: WPC), which might be probably the most diversified identify within the internet lease house, has 17% of its portfolio in retail and one other 5% in self-storage. International Internet Lease, then, has a really business-oriented portfolio. That is not inherently good or unhealthy however one thing to notice as you evaluate it to different names within the house.

As well as, as its identify implies, it has a world focus. Greater than a 3rd of its portfolio is situated in Europe, with the remaining within the U.S. market. That is fairly much like W.P. Carey’s breakdown and never inherently regarding. That mentioned, buyers want to acknowledge that monitoring the financial situations in the USA is just not sufficient. In truth, with COVID-19 instances spiking once more in Europe, this publicity is probably going a headwind that is restraining International Internet Lease’s shares and people of W.P. Carey.

High quality is one other problem to consider. International Internet Lease’s portfolio is weighted closely towards investment-grade tenants. Almost two-thirds of its rents come from such tenants, round twice the extent at W.P. Carey. It is also among the many highest of its direct opponents. This materially will increase the probability of getting paid each month.

International Internet Lease’s common lease size of 8.7 years can be fairly robust, although a few years lower than W.P. Carey. Nonetheless, at 8.7 years, a short-term drawback (like a recession) will probably move earlier than it has to cope with materials lease renewals — one other internet optimistic on the hire assortment entrance.

Nothing is ideal

Thus far, International Internet Lease sounds fairly attractive, even bearing in mind the considerations about its European publicity. However there are a few further components to think about.

First off, the dividend. International Internet Lease lower its dividend by 25% within the second quarter. That was obligatory as a result of the REIT’s funds from operations (FFO), which is like earnings for an industrial firm, wasn’t sufficient to cowl the payout. However even after the lower, the REIT’s FFO payout ratio was principally 100% within the third quarter. To be honest, after taking out sure objects, International Internet Lease’s adjusted FFO (AFFO) payout ratio was a more-acceptable, although nonetheless somewhat excessive, 87%.

Some comparisons will assist right here. W.P. Carey’s AFFO payout ratio was round 91% within the third quarter, nevertheless it has really elevated its dividend every quarter in 2020. And its FFO payout ratio was a far-lower 77%.

In the meantime, diversified internet lease peer VEREIT (NYSE: VER) has an AFFO payout ratio of round 50% after its dividend lower earlier within the yr. All in, International Internet Lease was compelled to chop its dividend, which no REIT desires to do, and but nonetheless hasn’t mounted the elevated payout scenario. So whereas the REIT is doing fairly properly portfolio-wise proper now, it nonetheless seems to be chopping issues form of shut on the subject of investor distributions. That is not comforting information should you’re a conservative investor.

Including to the discomfort is the corporate’s administration. W.P. Carey and VEREIT are each internally managed REITs, which implies the individuals who run them are staff of the REITs. International Internet Lease is sponsored by AR International, which has sponsored or cosponsored 14 different REITs. Basically, International Internet Lease pays administration charges to AR International. This is not inherently a foul setup, however it might probably result in questions on prices, contract construction, and potential conflicts of curiosity.

For instance, AR International additionally advises American Finance Belief (NASDAQ: AFIN), which International Internet Lease notes in its annual report has the same funding strategy however is targeted on simply the U.S. market. Nonetheless, round two-thirds of International Internet Lease’s portfolio is home, so buyers have each proper to surprise: Which AR International-controlled REIT will get deal choice?

Making issues much more sophisticated, the REIT’s CEO and CFO maintain comparable positions at different AR International firms. And within the “dangers” part of International Internet Lease’s annual report, feedback in regards to the payment construction between the REIT and AR International are something however settling: “These preparations, coupled with the truth that the Advisor doesn’t preserve a major fairness curiosity in us, might consequence within the Advisor taking actions or recommending investments which are riskier or extra speculative than an advisor with a extra important funding in us may take or suggest.”

This is not to counsel International Internet Lease is unhealthy, per se, however there’s much more buyers want to think about right here than could be the case at an internally managed REIT.

Tread fastidiously

Including a high-yielding and globally diversified internet lease REIT to your portfolio may undoubtedly enable you construct a seven-figure portfolio. However International Internet Lease might not be the one you need to add to the combo when you think about its still-high payout ratio (even after a dividend lower) and sophisticated administration construction. For extra conservative dividend buyers, peer W.P. Carey would in all probability be a greater possibility.