Today I’m looking at REITs to sell now, as they have little or no income and their prospects for investors are not that good as a result. Moreover, it may take some time for these REITs, or real estate investment trusts, to revive and renew their ability to produce income for their investors.
The fact is that investors choose REIT stocks because of their income-producing abilities and dividend yields. The fact that these trusts are concentrated in the real estate or mortgage industry is tangential to their income feature — investors want the reliable income that real estate and mortgage investments can bring.
But because of that focus on dividends, REITs with little or no income are of little value to market investors.
There are two ways to play this for investors. If they already own the shares, they can sell them before the funds fall further and invest somewhere better. Or else they can play on their downfall by buying puts or shorting the REITs.
Let’s dive in and look at these REITs to sell.
| PK | Park Hotels and Resorts | $14.65 |
| PEB | Pebblebrook Hotel Trust | $18.54 |
| RLJ | RLJ Lodging Trust | $11.79 |
| SVC | Service Properties Trust | $6.25 |
| HST | Host Hotels and Reports | $16.92 |
| INDT | Indus Realty Trust | $60.10 |
Park Hotels & Resorts (PK)
Yield: 0.3%
Park Hotels & Resorts (NYSE:PK) has one of the lowest yields of all REITs that pay dividends. That’s because this hotel stock can barely afford to pay a dividend, if it can at all. Its dividend is just 4 cents annually assuming it pays out for all four quarters, putting it on a minuscule 0.3% dividend yield. It seems it is paying one as a courtesy to some investors who can’t invest in stocks with no dividends.
The REIT had slightly positive funds from operations (or FFO) last quarter, but is still losing money on a net income basis. The REIT industry likes to use the FFO measure, along with EBITDA. They see it as more relevant since it is a cash flow-oriented measure of profitability.
The more pressing problem is that Park Hotels is saddled with a ton of crushing debt. Its debt load as of March 31 was over $4.67 billion, and it had just $639 million in cash on its balance sheet. Moreover, this is well over 100% of its $4.33 billion in book value.
In addition, its average interest rate was just over 5% but this is likely to rise going forward. Moreover, it is saddled with at least $62 million in interest costs each quarter.
As a result, the company is likely going to have to offload a number of its properties to reduce this debt load. In fact, it already started doing this in Q2. That reduces its earnings power and ability in the future to pay significantly higher dividends. Investors should tread carefully with this REIT.
Pebblebrook Hotel Trust (PEB)
Yield: 0.22%
Pebblebrook Hotel Trust (NYSE:PEB) is another distressed hotel REIT, just like Park Hotels. Similarly, its dividend is just 1 cent per quarter, and at $18.54 on July 22, that puts its dividend yield at just 0.22%. That is almost nothing.
Investors would actually be better off keeping their money in a bank that likely pays higher interest rates than this REIT.
Just like Park Hotels, the company reported a Q1 net income loss and a small FFO cash flow gain of 11 cents.
In addition, the REIT is facing $2.5 billion in debt and convertible notes with just $96 million in cash on its balance sheet as of March 31. That is about 83% of its $3 billion in shareholders’ equity (or book value) at that time.
One good thing is that its average interest rate is only 3.2%. However, that is likely to rise in this environment as its debt turns over. This could be very devastating for its income and cash flow.
As a result, I suspect the company will have to deleverage over time and reduce its assets and debt. That could lower its earnings power and ability to pay dividends.
RLJ Lodging Trust (RLJ)
Yield: 0.3%
RLJ Lodging Trust (NYSE:RLJ) is another hotel REIT that invests in high-quality, full-service, high-margin REITs. However, it is also highly leveraged and this means it can only pay a dividend of 4 cents annually. That gives it an annual dividend yield of just 0.3%, i.e., 30 basis points — akin to what you can get leaving your money in a bank.
Like the other hotel REITs on this list, the company makes a net income loss, but also generates a slightly positive FFO measure of cash flow. That is probably the only reason the company can justify paying any dividend at all.
And just like all the groupthink hotel REITs, the company is saddled with debt that could eventually begin to erode what little cash flow it still has. For example, as of March 31, the REIT has $2.2 billion in debt and just $479 million in unrestricted cash.
The company has not said what its average interest rate is, but whatever the rate, it is likely to rise in Q2 and thereafter.
Just like the others the debt almost equals its $2.4 billion in book value. As a result, I suspect that RLJ Lodging Trust will likely have to continue releasing properties. This could hurt its earnings power going forward.
Service Properties Trust (SVC)
Yield: 0.6%
Service Properties Trust (NASDAQ:SVC) is another lodging and hotel REIT that has a very similar situation to the other hotel REITs on this list. You may start to see that there is a lot of similarities in this part of this industry. They all got in trouble through over-leverage and had to cut their dividends dramatically.
Service Properties Trust is similar in that it only pays 4 cents annually. But based on its price of $6.25 as of July 22, its dividend yield now is just 60 basis points.
However, not only does the company not have positive net income, but it also had negative FFO cash flow in Q1 (i.e., negative 2 cents FFO).
Moreover, it was laden with over $7.1 billion in debt on its balance sheet as of March 2022. This is 5 times its book value of just $1.4 billion at the end of March. The company has started selling properties but may have to continue to do so very quickly in order to avoid transgressing bank or lenders’ covenants and ratios.
As a result, the company is still in a restructuring mode and investors should not expect its dividends will increase any time soon.
Host Hotels and Resorts (HST)
Yield: 2.1%
Host Hotels and Resorts (NASDAQ:HST) is a hotel and lodging REIT that is in better shape than the previous four on this list, but it it still has some major issues.
Recently the REIT raised its dividend to 6 cents per quarter, or 36 cents annually. But this is still well below the 20-cent quarterly dividend it paid previously. At $16.92 per share on July 22, the REIT now has a 2.1% dividend yield.
However, the REIT has a debt balance of $4.2 billion. This is equal to around two-thirds of its $6.5 billion shareholders’ equity balance as of March. That is not crushing, but it is still quite high.
Although the company’s average interest rate is just 3.4% now, that is likely to rise, given how rates are rising worldwide. This will increase its interest costs, lower cash flow, and lower its ability to hike the dividend.
As a result, investors should sell this stock if they already own it.
Indus Realty Trust (INDT)
Yield: 1.1%
Indus Realty Trust (NASDAQ:INDT) is a large warehouse REIT that has a much-lower-than-average dividend yield compared to the rest of the REIT industry.
Its annual dividend is 64 cents (16 cents per quarter). But compared to its price of $60.10 as of July 22, that puts its yield just over 1%. Most other REITs and common stocks, in general, have significantly higher dividend yields.
The problem is the company’s earnings can’t support a higher dividend payment. For example, last quarter the company made a net income of just 3 cents per share, compared to its 16 cents dividend.
The company probably justifies paying this amount even though it is higher than net income, because its cash flow, as measured by “core FFO,” was 38 cents per share. So the dividend is just under half of its core FFO cash flow.
The company’s debt levels are not excessive, at just 43% of its equity. However, if interest rates rise, the company will have a reduced ability to increase its dividend. It may be in a situation soon where it has to sell properties if its interest costs take the company negative in terms of profits or cash flow.
On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.