Ever since the Federal Reserve sounded the alarm over precarious interest rates, real estate investment trusts (REITs) have been on shaky ground. The issue plaguing the top REITs slated for sale, however, surpasses mere macroeconomic concerns.
What these unfortunate REITs face is a juxtaposition of REIT-specific and property class-specific obstacles. Whether due to debt burdens or tenant quality, these REITs find themselves in dire straits. Particularly hard-hit are certain real estate sectors like office spaces, enduring a seismic shift in demand that could be permanent.
While these risky REITs might present a short-lived trading opportunity — should financial results exceed expectations or positive updates emerge — the long-term outlook remains bleak.
With the looming threat of slashed distributions, suspensions, and further price plummeting, wisdom dictates swiftly cutting ties with these REITs if you currently hold any. And if you haven’t already, keep these REITs at arm’s length.
Global Net Lease (GNL)
Global Net Lease (NYSE: GNL) is a REIT focusing on triple net lease (NNN) properties in the United States and Europe, encompassing over 1,200 industrial, office, and retail properties, with 72% being single-tenant.
GNL’s vulnerability stems from high vacancy risks in its single-tenant office properties, exacerbated by the prevalence and permanency of remote work. Moreover, the REIT’s substantial debt burden puts it at risk of further share dilution through stock issuances for debt repayment.
As part of its cash-preservation strategy, GNL has been reducing its dividends. Despite its tempting 15% forward annual yield, future distribution cuts are anticipated, likely triggering more share devaluations. The allure of high payouts pales in comparison to the imminent risks.
Medical Properties Trust (MPW)
Medical Properties Trust (NYSE: MPW), not long ago perceived as a prime short-squeeze candidate amid tenant troubles, has taken a nosedive, plummeting 26% in recent weeks. This downfall follows the potential collapse of Steward Health’s deal to sell its physician group.
Steward Health, a problematic tenant, was expected to utilize the sale proceeds to settle rental dues with MPW. Compounding the issue, Prospect Medical Holdings, another financially distressed tenant, poses further threats of distribution cuts and stock depreciation, leaving investors with a hasty exit strategy.
NexPoint Diversified Real Estate Trust (NXDT)
We’ve barely scratched the surface of the distress permeating the beleaguered REIT sector. Amid unsettling trends and uncertain futures, investors would be prudent to exercise caution and evaluate their holdings judiciously to avoid further fiscal mishaps.
Challenges in the Diverse REIT Landscape
NexPoint Diversified Real Estate Trust (NYSE:NXDT) owns a wide array of real estate assets, spanning from single-family homes to self-storage facilities and various other real estate income classes. Theoretically, this diversification should safeguard investors. However, a closer look reveals a different story.
The Tale of NexPoint Diversified Real Estate Trust
Despite spreading its investments, NXDT stock has witnessed a steep decline of over 55% in the past year. This downtrend stems from several risky assets, including rent-stabilized single-family homes and a Dallas office tower with an alarming 49% vacancy rate as per NexPoint’s latest presentation. Market sentiments reflect underlying risks, and the lingering question remains: is the nearly 60% discount truly indicative of the peril ahead?
The Chronicle of Orion Office REIT (ONL)
Orion Office REIT (NYSE:ONL) emerges with a similar narrative. Specializing in single-tenant suburban office buildings, ONL faces precarious circumstances. Although management maneuvers like divesting 20 non-core assets to bolster finances, high vacancy rates and a tenant mix downgrade cast shadows over its future. While dividends remain steady, the 11.46% forward yield could face jeopardy amid tumultuous times ahead.
The Timber Troubles of PotlatchDeltic (PCH)
PotlatchDeltic (NASDAQ:PCH) falls into the category of timber REITs, boasting ownership of 2.2 million acres of timberlands across seven U.S. states alongside sawmill operations under taxable REIT subsidiaries. Despite this expansive portfolio, PCH stock has taken a hit, plummeting around 29% in the past year due to declining lumber demand. The recent shift from profitability to a break-even scenario aligns with the broader challenge of adverse interest rates.
The Ebb and Flow of Real Estate Investment Trusts Amid Market Volatility
Peakstone Realty Trust (PKST): A Closer Look
As the unpredictable tides of the market sway, real estate investment trusts find themselves in precarious positions. Peakstone Realty Trust (NYSE:PKST) stands as a testament to this instability. Boasting an array of industrial and office properties, the REIT prides itself on quality and safety. However, a deeper dive reveals a tale of caution.
While Peakstone’s creditworthy tenant base and long-term lease agreements with built-in escalations may paint a rosy picture, the shadows of its non-core portfolio lurk nearby. Representing 13% of the total annual base rent, these assets could plunge the trust into turbulent waters if disposal leads to realized losses. Investors eyeing PKST’s substantial 8.72% yield need to tread carefully, for the storm of asset disposal losses may outweigh the allure of high payouts. Given these factors, prudence dictates regarding PKST as one of the REITs better off unloaded.
Service Properties Trust (SVC): A Deepening Predicament
Meanwhile, as investors tiptoe through the minefield of real estate investment trusts, Service Properties Trust (NASDAQ:SVC) finds itself ensnared in a dwindling predicament. Specializing in hotels and net-lease retail properties, SVC, like a vessel guided by an external hand, struggles in choppy waters.
Trapped in the shadow of the “RMR discount,” with shares echoing a 25% discount to book value, SVC reels under the weight of dwindling fiscal performance. The pandemic’s unrelenting grasp has caused a 43% plunge in funds from operations, signaling stormy weather ahead. Despite a tempting 15.81% forward dividend yield and a low FFO multiple, daring to catch the falling knife of SVC’s shares may prove to be a perilous endeavor.