Debt maturities are a big consideration in all areas of commercial real estate, including net lease. The topic came up in most recent earnings call for Global Net Lease (GNL), one of the largest public REITs focused on net lease.
The reason for a focus on debt maturities and the connected topic of interest rates is because they put pressure on all CRE businesses. The stock price reflects concerns about macroeconomics and finance. There was a sharp plummet starting late February 2020, which makes sense given pandemic-related shutdowns of retail businesses. With the advent of successful vaccines, the price regained ground to within a couple of dollars by June 2022, and then came the Federal Reserve’s reaction to inflation — a series of sharp and quick rate hikes. And the stock started falling again, from $19.90 to $7.56 as of March 18, 2024.
The expected wave of CRE loan debt maturities is a problem across CRE. That includes net lease properties.
“GNL is implementing a 2024 business plan focused on deleveraging its balance sheet, reducing its exposure to variable rate debt and driving down its net debt to adjusted EBITDA,” said co-CEO Mike Weil during the most recent earnings call. “Our near-term strategic priority will focus on reducing leverage through select dispositions, prioritizing noncore assets and opportunistic sales.”
He further said that assets targeted for disposition include both non-core and those that have near-term debt maturities or implied-term lease expirations. The latter is important because the company focuses on investment-grade or near-investment-grade tenants, with 58% of their tenants in that category. Single-tenant retail represents two-thirds of the investment-grade or implied investment-grade tenants. If a significant portion of the lease expirations are among these tenants, turnover would put more financial pressure on the company.
The largest segment of their portfolio is industrial and distribution, and that segment has been seeing pressures of late that had once seemed to pass the category by.
“Total annual industrial leasing activity fell to 790 million sq. ft. in 2023 from a record 1 billion sq. ft. in 2021 and was not enough to offset the large amount of new supply,” wrote CBRE earlier in March. “As a result, the overall industrial vacancy rate jumped by 180 basis points (bps) last year to 4.8%, returning to near its 10-year average of 4.7%. Developers predictably became more hesitant to break ground and construction starts fell to 46.3 million sq. ft. by Q4 2023 from a quarterly average of 102.5 million sq. ft. in 2022.”
“GNL has a plan to address the remaining 2024 debt maturities through dispositions, refinancing and availability on the credit facility,” said chief financial officer Chris Masterson. “We will continue to address the 2025 maturities and anticipate that the second half of 2024 will present a more favorable environment for debt maturities beyond 2024, but we remain confident in our ability to refinance these assets.”
“We expect a total of $400 million to $600 million of strategic dispositions in 2024,” Weil said. “This disposition program will drive long-term shareholder value by generating cash to enhance and derisk our balance sheet and create a clear path forward for us to potentially narrow the trading discount compared to our net lease peers. Selling assets at attractive cap rates will also provide proof of value to investors and demonstrate a significant premium compared to where the company is currently trading on an implied cap rate basis.”
Source: GlobeSt.