Although the Federal Reserve’s continued caution regarding interest rate cuts has stymied a further recovery for real estate investment trusts (REITs), when it comes to the top REITs to sell, that’s not the main issue at hand.
Rather, these clear-cut sells in the sector face either REIT-specific or property class-specific headwinds. That is, there are REITs experiencing issues related to debt and tenant quality. Also, certain types of real estate, namely office buildings, continue to be negatively affected by sweeping changes that have materially changed demand — perhaps permanently.
Although these riskier, more uncertain REITs to sell can turn into profitable near-term trades, such as when better-than-feared results are released or there is a positive update regarding these issues, their respective long-term prospects remain grim.
At risk of both cuts and suspensions of their REIT distributions and further price declines, your best move with each of these REITs to sell is to dump them if you own them and stay away if you’ve yet to enter a position.
Global Net Lease (GNL)
Global Net Lease (NYSE:GNL), is, as you might have guessed, a REIT focused on the ownership of triple net lease (NNN) properties. In both the United States and Europe, GNL owns over 1,200 industrial, office and retail properties. And 72% of its properties are single-tenant.
Back in May, I laid out the bear case for GNL stock. For one, vacancy risk runs high with Global Net Lease. A total of 20% of its properties are single-tenant offices, one of the riskier property asset classes in today’s environment, where remote work is widespread and here to stay. Alongside vacancy risk, GNL’s high debt leaves the REIT at risk of diluting existing shareholders through the issuance of newly issued stock to pay down debt.
As part of its efforts to conserve cash, GNL has been cutting down its dividend as well. Over the past year, GNL’s quarterly distribution has fallen, first from 40 cents to 35.4 cents per share, then from 35.4 cents to 27.5 cents per share. The REIT may sport a nearly 15% forward annual yield at current prices, but given the risks, further cuts, which will likely drive further share price declines, outweigh the upside from this double-digit payout.
Medical Properties Trust (MPW)
Last month, I argued that Medical Properties Trust (NYSE:MPW) appeared poised to continue squeezing higher as the healthcare-focused REIT worked out issues with a problem tenant, leaving the short sellers betting against the MPW scrambling to close out positions.
This month, however, it’s clear that rather than a compelling short-squeeze play, MPW is again better described as one of the REITS to sell. Over the past month, MPW stock has tumbled to the tune of 26%. That’s mostly due to the possible scrapping of Steward Health’s sale of its physician group. Steward Health is the aforementioned problem tenant. Before the news, the assumption was that Steward would complete this deal, with the healthcare provider using the proceeds to pay back outstanding rental payments to MPW.
To make matters worse, it’s not as if Steward is Medical Properties Trust’s only problem tenant. As Seeking Alpha commentator KM Capital recently argued, Prospect Medical Holdings is another tenant facing financial distress. If issues with either of these tenants intensify, it could lead to further cuts to MPW’s distribution, as well as continued reversal back to lower prices for shares. If you bought in before the squeeze, make a fast exit — ASAP.
NexPoint Diversified Real Estate Trust (NXDT)
NexPoint Diversified Real Estate Trust (NYSE:NXDT) owns a wide mix of real estate assets. From single-family homes to self-storage facilities and most other real estate income classes in between, NXDT should live up to the “diversified” in its corporate name in theory by providing investors with a diversified real estate portfolio.
Yet, while this REIT has spread its chips widely, that’s not to say it is a safe, steady investment opportunity. NXDT stock has fallen by more than 55% over the past year for a very good reason. As Seeking Alpha commentator Hydra Research pointed out in May, NexPoint Diversified Real Estate Trust has several risky assets, including an interest in a portfolio of rent-stabilized single-family homes, as well as an office tower in Dallas, Texas.
Per NexPoint’s latest investor presentation, the office tower has a vacancy rate of 49%. By bidding down NXDT, the market is attempting to price in the underlying risk, but the nearly 60% discount may not fully reflect this. If NexPoint ends up having to sell off assets at lower prices than currently expected, this could drive the next big round of price declines for NXDT shares.
Orion Office REIT (ONL)
Orion Office REIT (NYSE:ONL) is another name that I previously highlighted as being one of the REITs to sell. Much like with similarly-named Global Net Lease, the bear case here is pretty cut-and-dry.
In a nutshell, Orion Office REIT owns some of the most at-risk real estate in the United States. That would be single-tenant suburban office buildings. Orion’s management may be trying to implement sweeping changes to stabilize the REIT. For instance, as CEO Paul McDowell noted in a recent interview recorded during Nareit’s REITweek 2024 conference last month, the REIT has sold off 20 non-core assets. This, in turn, has enabled the REIT to pay down debt, as well as build up a war chest for new property acquisitions.
Still, it could all prove too little, too late for ONL stock. As Orion Office REIT keeps dealing with a high vacancy rate and a lower-quality tenant mix, additional declines for the stock may be in the cards. ONL has thus far maintained its dividend, but don’t assume that an 11.46% forward yield is here to stay. Payouts could end up on the chopping block as well.
PotlatchDeltic (PCH)
PotlatchDeltic (NASDAQ:PCH) is one of several publicly traded “timber REITs,” or REITs that focus on the ownership of timberland acreage. The trust’s portfolio consists of 2.2 million acres of timberlands, across seven U.S. states. The company also owns taxable REIT subsidiaries that engage in sawmill operations.
Over the past year, PCH stock has fallen by around 29%. This pullback has been driven by falling lumber demand and its impact on PotlachDeltic’s fiscal performance. Last quarter, for instance, sales fell by around 12% year-over-year, and the REIT went from profitability to break-even. One can technically say this industry-specific headwind is somewhat related to the overarching high interest rate issue.
Lumber prices have kept falling due to decreasing new home construction, resulting from the big spike in interest rates since 2021. However, while only indirectly an interest rate problem, it’ll likely only take a normalization in rate policy to get PCH back on track. Whenever that happens, the construction market could bounce back, taking this stock along for the ride. For now, however, as “higher for longer” persists, expect PCH to stay one of the REITs to sell.
Peakstone Realty Trust (PKST)
Peakstone Realty Trust (NYSE:PKST) owns a portfolio of industrial and office properties. A look at Peakstone’s website suggests this REIT places a more-than-adequate amount of attention on quality and safety.
That is, Peakstone has a largely creditworthy tenant base, not to mention long-term net lease agreements in place with these tenants — with build-in escalations. Yet, while all of this makes it sound like PKST stock could be a “set it and forget” type of REIT play, I wouldn’t make that assumption. Peakstone may tout its higher-quality industrial and office properties, but that’s because, for segment reporting purposes, the REIT separates out vacant and non-core properties it is working to dispose of.
What remains of the non-core portfolio makes up 13% of the REIT’s total annual base rent. Whittling down the rest of the non-core assets could result in realized losses for Peakstone. Even if PKST’s 8.72% annual yield is sustainable, the impact of realized asset disposal losses on the stock price could outweigh this high rate of payout. With all of this in mind, consider PKST one of the REITs to sell.
Service Properties Trust (SVC)
Service Properties Trust (NASDAQ:SVC) owns a portfolio of hotels and a smattering of net-lease retail properties. SVC is one of many publicly traded REITs externally managed by The RMR Group (NASDAQ:RMR). Investors’ concerns about RMR’s fee structure have long had a negative impact on RMR-managed REITs, resulting in what some have in the past called the “RMR discount.”
SVC stock is not immune to this phenomenon. Shares currently trade at a 25% discount to book value. However, that’s not all. Beyond the questionable prospects of Service Properties Trust closing this valuation gap, it should be noted that SVC’s fiscal performance, severely affected by the pandemic, continues to get worse. As InvestorPlace’s Alex Sirois recently pointed out, last quarter the company reported a 43% drop in funds from operations (FFO), or the REIT equivalent to earnings.
Continued poor performance will likely drive additional downward pressure on shares, not to mention potentially lead to a cut or suspension of SVC’s quarterly distributions. SVC has a low FFO multiple and a 15.81% forward dividend yield, but make no mistake, buying the dip could end up being a lot like trying to catch a falling knife.
On the date of publication, Thomas Niel 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.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.