3 REITs Likely To Cut Their Dividend In 2024

seekingalpha03-28

Most REITs are growing their dividends.But there are exceptions that are at risk of cutting it.I discuss three REITs that are likely to cut their dividend. michaelquirk Last week, I highlighted ...

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You can read the article by clicking here.  But it is not all sunshine and rainbows in the REIT world. Not all REITs are in a position to grow their dividend. There are also quite a few REITs that will likely cut their dividends in the near term. That's the focus of today's article. Here are three REITs that I expect to cut their dividend later this year: Apollo Commercial Real Estate Finance Mortgage REITs (MORT) are today facing severe stress. The problem is that they lent too much money when interest rates were near zero and real estate values were at their peak. This is the case of Apollo Commercial Real Estate Finance, Inc. (ARI). Just look at how much it lent in 2022 compared to the prior years:   Apollo Commercial Real Estate Finance Those loans may have had reasonable terms back then, with LTVs in the 60-70% range and solid interest coverage ratios, but as interest rates began to surge, these loans quickly became a lot riskier. LTVs expanded dangerously close to 100%, meaning that the equity of the borrower has been nearly wiped out, and in many cases, the borrowers are dangerously close to defaulting on their interest payments because they had variable rates that they couldn't afford. This recently prompted KKR Real Estate Finance Trust Inc. (KREF) to cut its dividend nearly in half as they prepare to face some losses, and I expect other mortgage REITs, or mREITs, to follow this same path in the coming quarters. Apollo Commercial Real Estate Finance today offers a 12.5% dividend yield, but its dividend is just barely covered and I don't think that they will manage to maintain it over the long run. The payout ratio is near 90% and leaves little margin of safety in case they face some loan defaults. They already cut their dividend once in 2020, and in the last earnings call, they gave hints of another potential cut in 2024. Here is what the CEO of the company said: \"As I have stated many times previously, the dividend is ultimately dependent on board action, and it is reviewed and discussed and ultimately declared by the Board on a quarterly basis. While it is subject to that Board approval, at present, our current modeling for the future indicates that we remain comfortable with the current dividend level of $0.35 per share. We will obviously review it with the Board on a go-forward basis, but in light of questions that we anticipated, I wanted to provide that context at this time.\" Some will take this as a reassurance that the dividend is sustainable, but I see it the opposite way. The fact that they even need to say this is concerning. The reality is that there is little room for error, and Apollo's portfolio will likely suffer some setbacks in the coming quarters. Nearly half of Apollo's portfolio is backed by hotels and offices, which are amongst the riskiest assets to have as collateral in today's environment as we potentially approach a recession.   Apollo Commercial Real Estate Finance The 15% exposure to residential could also prove problematic, as cap rates have moved a lot and rents are now slightly declining due to the oversupply. Moreover, more than half of the portfolio is actually in Europe, which is facing even greater stress than the U.S.   Apollo Commercial Real Estate Finance Finally, they are using a lot of leverage with their equity only representing about a quarter of the capital stack. They have no debt maturities for the next two years, which is good, but they have a big refinancing wall coming in 2026, and they will likely need to start refinancing that in 2025, putting further pressure on their dividend:   Apollo Commercial Real Estate Finance Therefore, I think that dividend cut is likely. Global Net Lease I have discussed Global Net Lease, Inc. (GNL) in prior articles and explained that its dividend likely isn't sustainable because:  The dividend was not covered. The leverage was too high. They were heavily exposed to risky assets. The management had a poor track record. They were targeting dilutive growth.  Sure enough, they now announced a dividend cut in their most recent earnings call: \"Our near-term strategic approach also involves a planned reduction of GNL's annual dividend from $1.42 to $1.10 per share, increasing the amount of annualized cash by $74 million to further reduce leverage. This reflects the company's continued commitment to strengthening its balance sheet while maintaining a disciplined dividend policy.\" But even that's not enough in my opinion. This puts the payout ratio at 81%, which is amongst the highest in the net lease property sector. The management explains that they generate a higher percentage of their revenue from investment grade rated tenants and therefore, they feel comfortable with this payout ratio. I think that it is yet another mistake that will likely lead to another cut down the line. The reality is that they have one of the weakest (not strongest!) portfolios in their peer group. Their occupancy is amongst the lowest at 96%. Their lease terms are amongst the shortest at 6 years. They own a lot of single-tenant office buildings that likely have near 0 equity value, and most of their industrial properties were bought at high cap rates and have very risky releasing prospects. Yes, their tenants may have investment-grade ratings, but that's actually going to be a headwind for them as leases expire because their tenants will hold a lot of bargaining power and ask for significant concessions. The management has one of the worst track records in the entire REIT sector, having failed to earn a positive return to shareholders since going public ... and they continue to make poor decisions in my opinion: Data by YCharts A much steeper cut would have reassured investors by allowing them to pay off debt and reinvest without having to make dilutive equity issuances. I will continue to avoid the stock. Easterly Government Properties Easterly Government Properties, Inc. (DEA) is a very popular REIT because of one reason: its tenants are government agencies for the most part.    Easterly Government Properties This means their leases are considered very secure. They are fully backed by the U.S. government. Moreover, the dividend yield is now approaching 10%. A near 10% yield that's backed by the full faith of the U.S. government? Sign me up! But here's the issue: The dividend is not covered. They have too much debt. And they own a lot of single-tenant office buildings that will likely face significant losses as their leases expire. As long as the leases have years left on them, they will be fine and they can keep pushing the dividend cut into the future, but eventually, this will come back to bite them because they will not have made enough progress deleveraging the balance sheet before they start incurring losses if they stubbornly maintain the dividend. An analyst framed nicely summarized their issue on their most recent earnings call:  John Kim My final question is just a follow-up on Michael's on the dividend. Your payout ratio on CAD was 118% last year. If you assume growth of 4% per annum that'll take about five years to cover it. I'm assuming some of these development loans that you provide are probably not going to be cash -- on a cash basis as far as the yield. Why not address the dividend now as you're going through more of a growth strategy rather than a stability and high yields, focused strategy that you've had previously?  And 4% annual growth in FFO per share is way too optimistic for DEA. They have very small contractual rent hikes in their leases, they cannot grow accretively, and their interest expense will continue to rise in the coming years. For years, they grew their portfolio by acquiring new assets but failed to grow on a per share basis. Now their cost of capital is higher than ever so I don't understand the optimism displayed by the management. There is a wide discrepancy between what they say and the actual results of the company. Another analyst pushed back on the overly positive commentary of the management by saying the following:  Michael Lewis And then, I guess this is a follow-up to a follow-up. Just on the dividend, you talked about the predictability of cash flows in relation to the dividend policy. But obviously, when you set that dividend you didn't predict obviously that you'd be material below your cash flow. You raised the dividend in 3Q 2021. You haven't covered it since 3Q 2022. I get -- the company is built for the stability and I know the dividend is a big piece of that. But I guess this goes back to kind of the other questions people ask... It sounds like you're willing to fund this for a material amount of time. Just confirming, I guess.  I might be missing something, but I just don't get it. The REIT market is not giving them any credit for paying this dividend. On the contrary, it is concerning most investors and yet, they refuse to cut. I have seen this play out before and I think that it is just a question of time. It is unfortunate because I would be much more interested in buying shares of this REIT if they just cut their dividend.  This shows you once again that it is crucial to be selective when investing in REITs.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2422164119"}