Real estate investment trusts (REIT) provide steady income, and most recently, capital appreciation for most investors. Still, I believe that it is advisable to divest in REITs because of different economic and real estate-related issues.
First, the environment of increasing interest rates in the last two years affected the borrowing costs for REITs. Moreover, some segments including the industrial centers are stable, while others like offices and traditional retail malls are struggling with the impact of remote working and altered consumer behavior. Some of these companies are on this list of REITs to sell.
The REIT sector is also dealing with volatility and is lagging behind other markets like the S&P 500 to some extent. For example, even though there have been some improvements, a large number of REITs are still priced substantially below their net asset values, which is an indication of investor doubts regarding future performance. Also, the future wave of commercial real estate debt refinancing can also result in defaults and distressed asset sales that will result in lower prices and returns.
A strong case then can be made for REITs to sell in general, as well as the three companies outlined in this article.
Medical Properties Trust (MPW)
Medical Properties Trust (NYSE:MPW) seems to be one of the REITs to sell. The main issues stem from the marked decline in the firm’s core business and the ability to produce cash.
The main problem is the financial problems of MPW’s biggest tenant, Steward Health, which became bankrupt and filed for Chapter 11. This has created a lot of stress on MPW’s business given that Steward represents a fifth of the REIT’s assets.
In the future, MPW also has several major debt maturities in the next several years, and this indicates that the company might have difficulties in refinancing the debt at reasonable rates due to the deterioration in the business’s cash flow. This could go further in worsening the financial situation of the company and there could be a situation where the common equity becomes valueless.
MPW is highly leveraged, with a negative net cash position of $16.73 per share and is $10.26 billion in debt. This then makes its risk profile very unappealing to me, and thus one of those REITs to sell.
Paramount Group (PGRE)
In my view, the current investment opportunity in Paramount Group (NYSE:PGRE) is rather unattractive, so I would classify it as one of those REITs to sell.
Despite strong tenants of the company like JPMorgan Chase (NYSE:JPM) and Morgan Stanley (NYSE:MS), the negative factors that affect the office REITs remain equally significant. It faces decreasing occupancy rates and lower asking rents on new leases. These are undermining the company’s core funds from operations and the viability of its dividend.
Furthermore, Paramount has a very centralized debt maturity schedule with a large percentage of its debt maturing in the year 2026, some 41.4%. This, together with the increasing interest rate environment, results in high refinancing risks to the company.
Like with MPW, PGRE also has a negative net cash position of $14.82 per share. I also feel that PGRE is one of those REITs to sell due to analysts forecasting a shrinking top line for the next few years ahead.
American Tower (AMT)
American Tower (NYSE:AMT) has always been a great performer and benefited from the increase in wireless data traffic and 5G network expansion but several factors make me concerned about the company’s prospects, and thus one of those REITs to sell.
One of the major concerns is the high leverage of American Tower: its debt-to-EBITDA ratio is above 6x, and has Standard & Poor’s credit rating of BB-, which is close to junk bond status, as one author on Seeking Alpha pointed out. This high leverage exposes the company to the risks associated with increasing interest rates, which will affect the costs of refinancing and hammer the company’s profitability.
In addition to the author’s comments, I also feel that AMT is one of those REITs to sell for other reasons, namely that its stock price has been essentially flat for the last five years, shrinking by 0.81%. At the same time, its dividend growth rate has also been declining from double-digit increases and now to the single digits. It also pays a dividend of just around 3%, which may not be satisfactory for most investors.
On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to theInvestorPlace.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.