What is the potential financial impact of the lawsuit on Necessity Retail REIT's balance sheet and cash flow?

Financial impact

The Pomerantz suit creates a contingent liability for Necessity Retail REIT (RTL). Even though the case is still in the investigative stage, the company may have to set‑aside a reserve on the balance sheet to cover potential settlement costs, legal fees, and any retro‑active adjustments to the Global Net Lease (GNL) share‑exchange that investors received. A material reserve would reduce the shareholders’ equity line and could trigger a write‑down of the “investment in GNL” asset if the court determines that the exchange was over‑valued or that RTL over‑paid. In the near term, the most visible balance‑sheet effect will be a increase in accrued liabilities (or a “contingent liability” footnote) that compresses the capital‑structure ratios that REIT analysts watch (e.g., debt‑to‑EBITDA, leverage on the FFO line).

On the cash‑flow side, the company will incur legal and advisory expenses that will flow through operating cash‑flow (or be capitalised if the case is deemed a “dispute” rather than a routine expense). If a settlement is required, the outflow will be classified as investing‑cash (a cash‑payment for the GNL‑related claim) or financing‑cash if the company elects to fund the payment through a share‑issuance or debt. Both scenarios shrink the free cash flow available for the REIT’s core activities—namely, property acquisitions, lease‑hold improvements, and dividend payouts. Given RTL’s historically modest cash‑generation profile, even a mid‑$10‑million outlay would represent a non‑trivial hit to its 2025‑2026 cash‑flow forecasts (roughly 5‑7% of projected FFO).

Trading implications

The lawsuit adds a downside‑risk premium to RTL’s valuation. In the short term, the market’s -70 sentiment and the potential for a balance‑sheet hit are likely to pressure the stock lower, especially if the share price is already trading near a technical support level (e.g., the 20‑day EMA around $9.30). Traders should consider a short‑position or a protective put if exposure to RTL is already sizable, while keeping an eye on any court filings that could clarify the exposure size. Conversely, if the case proceeds without a material settlement (i.e., the reserve is minimal), the stock could rebound on the “no‑bad‑news” narrative. In either scenario, monitor RTL’s upcoming 10‑K and cash‑flow statements for any disclosed liability reserves, as those disclosures will be the decisive trigger for price moves.