To The Moon

$Global Net Lease(GNL)$ $Agree(ADC)$

In today's article, I'll discuss the darker side of the Real Estate Investment Trust sector and highlight two REIT comparison and what REITs that you should avoid at all costs.

Internally or Externally managed REITs

The REITs to avoid is externally managed REITs. It's important to understand that REITs can be either internally or externally managed, and while this may seem like a small detail, it's actually a big deal.

Internally managed REITs have dedicated management teams that work directly for the REIT, with their compensation often tied to performance metrics such as growth and returns. This creates better alignment between management and shareholders, as well as economies of scale. On the other hand, externally managed REITs outsource management to external asset management companies, like Blackstone. The problem with this model is that managers' fees are tied to the volume of assets under management, which incentivizes them to issue more shares to raise capital, often leading to conflicts of interest.

Historically, externally managed REITs have under performed internally managed REITs. A good example of this is Global Net Lease, which is externally managed, compared to Agree Realty, an internally managed REIT. Agri Realty has consistently outperformed over the long term. Although Global Net Lease has internalized its management recently, many other REITs still use the external model, and I would generally avoid them.

The difference between internally managed and externally managed REITs (Real Estate Investment Trusts) lies primarily in how they are managed and who controls the operations and decision-making.

Internally Managed REITs

In an internally managed REIT, the management team works directly for the REIT as employees. Their compensation is typically tied to key performance indicators (KPIs), such as the growth of the REIT's portfolio and its return on investment. This structure aligns the interests of the management with those of the shareholders, because the managers are incentivized to perform well, knowing that their compensation and job security are directly tied to the success of the REIT. Internally managed REITs often have better economies of scale and a more focused strategy, as they tend to specialize in a specific property type.

Advantages:

• Alignment of Interests: Managers’ performance is closely tied to the performance of the REIT.

• Better Control: The REIT’s internal team has greater control over decisions and strategy.

• Long-term Focus: Since the management is directly employed by the REIT, they tend to focus more on long-term value creation.

Disadvantages:

• Potential for Bureaucracy: Internal management can sometimes be less flexible or slower to make decisions.

• Higher Costs: Salaries and compensation packages for internal teams may increase costs.

Performance

The Stock Increase over 40% year to date, performance is much more better than the External Managed REITs.

Externally Managed REITs

Externally managed REITs outsource the day-to-day management to an external asset management company. This management company is typically paid a fee based on the assets under management (AUM) or the size of the portfolio. Since the fees are often tied to the size of the portfolio, this creates an incentive for the external managers to grow the REIT’s asset base, even if that growth isn’t in the best interests of the shareholders. This can lead to conflicts of interest, as the external manager might prioritize growing assets rather than focusing on the long-term returns for shareholders.

Advantages:

• Flexibility: External management can sometimes bring in specialized expertise and offer a more flexible approach.

• Lower Overhead: External management might reduce the need for an internal management team, lowering some overhead costs.

Disadvantages:

• Conflict of Interest: The external managers are paid based on the size of the portfolio, which could encourage them to expand the REIT quickly, potentially sacrificing returns or shareholder value.

• Less Control: Shareholders may have less direct influence over management decisions.

• Historically Poor Performance: Many externally managed REITs have underperformed internally managed REITs due to misaligned incentives and higher costs.

ADC VS GNL Stock

Agree Realty Corporation (ADC) and Global Net Lease, Inc. (GNL) are both real estate investment trusts (REITs), but they operate in different segments and have different investment profiles, which affects their stock performance. Here’s a comparison based on recent trends:

Stock Performance Overview (2024)

Agree Realty Corporation (ADC):

• Sector: Retail REIT, primarily focused on single-tenant properties leased to high-quality, investment-grade tenants under triple net leases (NNN).

• Stock Performance:Stable Growth: ADC’s stock has generally shown consistent growth, driven by its strong focus on retail properties leased to tenants such as grocery chains and pharmacies, which are considered essential services and less vulnerable to e-commerce trends.Dividend Growth: ADC has a solid history of paying attractive dividends, which is a key selling point for income-focused investors.Stock Price: As of recent data, ADC’s stock price has trended upward with stable performance, with modest dips during broader market corrections, but has rebounded quickly.Q3 2024 Performance: ADC reported a 2.8% increase in AFFO per share year-over-year and raised its AFFO per share guidance for the full year, signaling healthy performance and growth. Additionally, ADC has made significant acquisitions, bolstering its portfolio and long-term outlook.

Global Net Lease, Inc. (GNL):

• Sector: Global REIT, primarily focused on commercial real estate assets, particularly in office buildings and industrial properties, but has a more diversified international portfolio.

• Stock Performance:Volatility: GNL has experienced more stock price volatility in recent years compared to ADC, often due to its exposure to international markets and office properties, which have faced challenges in the wake of shifts to remote work and changes in demand for office space.Challenges: GNL stock performance has struggled with rising interest rates and changes in demand for office space, which has led to increased vacancies and higher operating costs for some of its tenants. This has been compounded by external management structure issues, which led to poor returns historically.Recent Performance: In the third quarter of 2024, GNL reported a net loss of $76.6 million, though its core funds from operations (FFO) showed some positive growth. The company is actively working to reduce leverage by selling assets, but its overall performance has lagged behind more stable, internally managed REITs like ADC.

Comparison:

• Stability: ADC has been more stable and consistent, benefiting from its focus on essential retail properties and a strong U.S.-based tenant portfolio. GNL, with its diversified, international approach and focus on office properties, has faced more challenges in adapting to the post-pandemic work environment.

• Dividend Yield: ADC generally offers a reliable and growing dividend yield, which is appealing to income investors. GNL offers a high yield, but investors should be wary of potential risks related to the volatility and management structure of GNL.

• Growth Prospects: ADC has raised its AFFO per share guidance and continues to make strategic acquisitions, positioning it for continued growth. GNL, while making efforts to improve its financial position, still faces headwinds due to the volatility in the commercial real estate market, especially related to office properties.

• Risk: GNL carries higher risk due to its exposure to office space and international markets. ADC, on the other hand, is considered lower risk due to its focus on retail properties leased to investment-grade tenants and its internally managed structure, aligning better with shareholder interests.

Stock Performance Summary:

• Agree Realty (ADC): Generally outperformed GNL in terms of stability, growth, and dividend growth. ADC's focus on retail properties and long-term, triple net leases provides stability even during economic uncertainty.

• Global Net Lease (GNL): Has faced more volatility in its stock performance due to exposure to office properties and external management. While it has been attempting to streamline its portfolio, it still faces challenges, particularly from higher interest rates and market uncertainty.

If you're considering investing in REITs, ADC may appeal to those seeking consistent income and growth, while GNL may appeal to those looking for higher-risk, higher-reward opportunities but should be approached with caution due to its more complex challenges.

Conclusion

Internally Managed REITs have their own management team working for the REIT, which often leads to better alignment with shareholder interests and more consistent long-term performance.

Externally Managed REITs rely on third-party management, which can lead to conflicts of interest and less favorable returns for shareholders, despite the potential for more specialized expertise.

Investors typically prefer internally managed REITs because they tend to have better long-term performance and more alignment with shareholders' goals.

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