Sell These 11 REITs While You Still Can

seekingalpha06-10

The next two to five years probably will not be kind to REITs.Weak REITs with messy balance sheets, weak forecast for FFO growth, unsafe dividends, and/or overvaluation are likely to suffer the most ...

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Weekend Images Inc./E+ via Getty Images I have made no secret that I think REITs are going to sell off in a major way over the next couple of years. Even in the best of times, some REITs do better than others. But when the needle is pointing down for REITs in general, the weak ones get hammered. 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Weekend Images Inc./E+ via Getty Images I have made no secret that I think REITs are going to sell off in a major way over the next couple of years. Even in the best of times, some REITs do better than others. But when the needle is pointing down for REITs in general, the weak ones get hammered. What makes a REIT weak?  Messy balance sheet, with high indebtedness, excessive variable rate debt, and/or weak EBITDA. Weak forecast for FFO growth, when coupled with a messy balance sheet. An unsafe dividend, or a profile of yield and dividend growth that is well below average. Overvaluation, in terms of Price/FFO and/or premium to fair price, or excessive shorting, especially when coupled with any of the above.  The List What follows is a list of 11 REITs, across various sectors, that ping three or more of the above criteria. In all the tables that follow,  Forward FFO Growth is the Bloomberg consensus (educated guess) for 2024, compared to 2023. Dividend Safety is a rating assigned by Seeking Alpha Premium Quant ratings, based on a complicated formula with about 20 input variables. Dividend Growth is 4-year CAGR from Q1 2019 through Q1 2023. Dividend Score projects the yield 3 years from now, assuming no change in the rate of dividend growth. Premium to target price is a metric supplied by Hoya Capital Income Builder, calculating the amount by which the current price exceeds the target buy price.    Veris Residential Veris Residential (VRE) carries a debt ratio nearly double the sector average, and a very heavy Debt/EBITDA that is 5 times the sector average. Worse, 8.8% of its debt is carried at variable (therefore substantially higher) rates. The company's forward FFO growth is likely to more than double the average, but with EBITDA already so overwhelmed by the debt burden, this welcome development will not make much difference.   Ticker Debt Ratio Debt/EBITDA Var. Rate % Fwd FFO Growth *   VRE 54% 25.0 8.8% 7.6   Sector average 28% 5.0 2.6% 2.9%   Click to enlarge Source: Hoya Capital Income Builder VRE is a pathetic dividend payer, with a yield of 1.57% on a conservative 40% payout ratio. Its $0.15 in dividends paid for the past 12 months are down massively from the $0.80 it was paying over the same period 4 years ago. This is not typical of REITs in general, nor Apartment REITs in particular, despite the pandemic.   Ticker Div. Safety Div. Yield Div. Growth Payout Div. Score   VRE C 1.57% (-33.7)% 40% 0.00   Sector average C 3.78% 4.6 61% 4.33   Click to enlarge Source: Seeking Alpha Premium, Hoya Capital Income Builder, and author calculations Given its very serious indebtedness problems and its flimsy dividends, the high price of VRE shares is astonishing, at 28.8x FFO '23 and 91.1% above target buy price. It appears that VRE investors are counting on a merger that may or may not happen, and if it does, may or may not happen on terms favorable to them.   Ticker Price/FFO Premium to Target Price Short % Short Ratio   VRE 28.8 91.1% 5.55% 9.75%   Sector average 16.9 5.3% 2.03% 3.21%   Click to enlarge Source: Hoya Capital Income Builder   Braemar Hotels and Resorts Braemar Hotels and Resorts (BHR) is a crushable microcap at $0.22 billion, saddled with a choking debt ratio of 89%. A staggering 31.1% of its debt is held at variable rates. Although its Debt/EBITDA is decent at 7.0, it is higher than average, even in the Hotel REIT sector. The company's projected 27.8% FFO growth in 2024 represents a ray of hope, but nothing to hang your hat on, as FFO for 2023 had fallen to just $0.36 per share. A sizable amount of that increase will go to pay interest on the debt.   Ticker Debt Ratio Debt/EBITDA Var. Rate % Fwd FFO Growth *   BHR 89% 7.0 31.1% 27.8%   Sector average 39% 6.1 13.1% (-5.8)%   Click to enlarge Source: Hoya Capital Income Builder Although the dividend yield of 6.76% and ultra-low payout ratio of 30% seem attractive at first blush, the company's dividends are not reliable, having been discontinued for two full years during the pandemic, which is not unusual in the Hotel REIT sector. However, BHR still has restored its dividend to less than one-third of the pre-COVID rate, and that is unusual. The result is a dividend score that is well below the REIT average at 3.00.   Ticker Div. Safety Div. Yield Div. Growth Payout Div. Score   BHR C+ 6.76% (-25.2)% 30% 3.00   Sector average C 4.58% (-20.7)% 40% 2.28   Click to enlarge Source: Seeking Alpha Premium, Hoya Capital Income Builder, and author calculations BHR's Price/FFO of 7.9 looks attractive at first blush, but its short ratio of 7.29% provides a bit of a headwind to share price gain, and it would appear to be cheap for a reason. In a sector where the average company is selling at a 10% discount to target price, BHR shares are priced at a whopping 86% premium. Hoya Capital Income Builder pegs the target buy price at $1.50.   Ticker Price/FFO Premium to Target Price Short % Short Ratio   BHR 7.9 86% 2.74% 7.29%   Sector average 9.3 (-10.3)% 6.01% 5.78%   Click to enlarge Source: Hoya Capital Income Builder   Saul Centers Small-cap Strip Center REIT Saul Centers (BFS) (market cap $1.25B) has the weakest debt/EBITDA in the Strip Center sector, along with the highest debt ratio and the second-heaviest load of variable rate obligations. In a sector that is expected to grow slightly faster than average in 2024, the projected FFO growth for BFS is zero. So it fails across the board on its balance sheet, which is not investment rated.   Ticker Debt Ratio Debt/EBITDA Var. Rate % Fwd FFO Growth *   BFS 52% 11.9 10.4% 0.0   Sector average 36% 6.0 2.5% 3.9%   Click to enlarge Source: Hoya Capital Income Builder Although the yield of 6.42% and dividend score of 7.03 look enticing, the company gets a grade of D- from Seeking Alpha Premium for Dividend Safety, indicating an uncomfortably high likelihood of a dividend cut, which is the worst thing that can befall a dividend investor, short of the company going belly-up.   Ticker Div. Safety Div. Yield Div. Growth Payout Div. Score   BFS D- 6.42% 2.7% NA 7.03   Sector average C 4.49% (-0.5)% 57% 4.42   Click to enlarge Source: Seeking Alpha Premium, Hoya Capital Income Builder, and author calculations BFS is cheap for a reason, and looks great on all the price metrics, making it the perfect mousetrap. The cheese looks so tempting.   Ticker Price/FFO Premium to Target Price Short % Short Ratio   BFS 11.9 (-5.5)% 0.79% 1.69%   Sector average 13.2 (-1.2)% 2.28% 3.50%   Click to enlarge Source: Hoya Capital Income Builder   CBL Properties Small-cap Regional Mall REIT CBL Properties (CBL) (market cap $0.73B) is staggering under an 85% debt ratio with a hefty 16.8% of those obligations held at variable rates (ten times the sector average). On the plus side, earnings are sufficient to put the Debt/EBITDA at a decent 5.9. Unfortunately, FFO growth is projected to be negative this year. Heavy debt with shrinking FFO is a worrisome combination.   Ticker Debt Ratio Debt/EBITDA Var. Rate % Fwd FFO Growth *   CBL 85% 5.9 16.8% (-2.6)%   Sector average 38% 6.1 1.6% 3.1%   Click to enlarge Source: Hoya Capital Income Builder Like Saul Centers, CBL's dividend looks attractive, but Seeking Alpha Premium rates it D for Dangerous. The company has only been in business since late 2021, so a representative dividend growth and dividend score cannot be responsibly computed.   Ticker Div. Safety Div. Yield Div. Growth Payout Div. Score   CBL D 6.98% NA 20% NA   Sector average C 5.14% 0.2% 58% 5.17   Click to enlarge Source: Seeking Alpha Premium, Hoya Capital Income Builder, and author calculations CBL shares are dirt cheap at 3.6x FFO, but even so, Hoya Capital Income Builder considers it to be discounted from target price by a mere (-3.9)%. Meanwhile, it is heavily shorted, providing strong headwinds to price gains (unless someone decides it should be a meme stock, of course).   Ticker Price/FFO Premium to Target Price Short % Short Ratio   CBL 3.6 (-3.9)% 7.16% 20.15%   Sector average 11.7 (-13.0)% 1.99% 3.39%   Click to enlarge Source: Hoya Capital Income Builder   Global Net Lease Global Net Lease (GNL) has the worst Debt/EBITDA and second-worst debt ratio of all the Net Lease REITs. The company's load of variable rate obligations is more than 5 times the sector average. In a sector expected to grow at or slightly faster than the REIT average, GNL's projected FFO growth is essentially flat, at 0.9%.   Ticker Debt Ratio Debt/EBITDA Var. Rate % Fwd FFO Growth *   GNL 65% 17.2 13.9 0.9%   Sector average 35% 6.6 2.5 3.7%   Click to enlarge Source: Hoya Capital Income Builder GNL looks like a classic mousetrap. The yield of 14.45% and dividend score of 12.79 look too good to be true, and indeed, the payout ratio of 110% and Dividend Safety rating of F from Seeking Alpha Premium speak of an impending dividend cut. Notably, this company already trimmed the dividend in Q4 of 2023.   Ticker Div. Safety Div. Yield Div. Growth Payout Div. Score   GNL F 14.45% (-3.99)% 110% 12.79   Sector average C 6.04% 2.9% 77% 6.58   Click to enlarge Source: Seeking Alpha Premium, Hoya Capital Income Builder, and author calculations Although shares are dirt cheap at 7.8x FFO, they are still 8.7% overpriced according to Hoya Capital's calculations. Meanwhile, the company's shares are being shorted about double the sector average.   Ticker Price/FFO Premium to Target Price Short % Short Ratio   GNL 7.8 8.7% 4.62% 8.75%   Sector average 12.8 (-2.8)% 2.59% 4.13%   Click to enlarge Source: Hoya Capital Income Builder   SL Green Realty SL Green Realty (SLG) owns iconic office buildings in Manhattan. The company's 59% debt ratio is above even the Office REIT average, and only two of the 25 Office REITs sport a worse Debt/EBITDA than the 15.3 posted by SLG. Bear in mind, Office real estate is the likely epicenter of the coming meltdown. Add to this the company's projected FFO shrinkage of (-33.2)%, and you have a recipe for disaster.   Ticker Debt Ratio Debt/EBITDA Var. Rate % Fwd FFO Growth *   SLG 59% 15.3 3.6% (-33.2)%   Sector average 54% 8.7 11.9% 0.0%   Click to enlarge Source: Hoya Capital Income Builder SLG's yield is less than 100 bps above the no-risk rate available on U.S. Treasuries. The company already cut its dividend in December of 2022 and again in December of 2023. Although its dividend score outpaces the sector and overall REIT averages, if FFO collapses as forecast, it is hard to see how this company avoids further dividend cuts, despite its Dividend Safety grade of C.   Ticker Div. Safety Div. Yield Div. Growth Payout Div. Score   SLG C 5.53 (-2.01)% 60% 5.32   Sector average C 5.76 (-3.5)% 43% 5.18   Click to enlarge Source: Seeking Alpha Premium, Hoya Capital Income Builder, and author calculations In a sector whose short ratio is more than double the REIT average, SLG is the most heavily shorted, creating a strong headwind for share price gain. SLG shares are worth less than half what they fetched 10 years ago. Seeking Alpha Premium Meanwhile, SLG's Price/FFO is steeper than the Office REIT average, and while it still looks cheap, Hoya Capital Income Builder considers it 8.4% overpriced, and 20.6% above NAV.   Ticker Price/FFO Premium to Target Price Short % Short Ratio   SLG 10.7 8.4% 20.87% 14.24%   Sector average 8.1 3.3% 6.99% 7.24%   Click to enlarge Source: Hoya Capital Income Builder   Industrial Logistics Industrial Logistics Properties Trust (ILPT) is a micro-cap (market cap $0.26), externally managed by RMR Group. In a sector characterized by sturdy balance sheets, ILPT is the downside standout. Debt Ratio of 86%, Debt/EBITDA of 16.0, and variable rate obligation load of a horse-choking 52.8% all speak of a company in far over their heads. The one ray of hope for this moribund balance sheet is a very healthy 16.7% projected growth in FFO. It will take several years of that kind of performance, to clean up this mess.   Ticker Debt Ratio Debt/EBITDA Var. Rate % Fwd FFO Growth *   ILPT 86% 16.0 52.8% 16.7%   Sector average 20% 5.4 1.2 8.7%   Click to enlarge Source: Hoya Capital Income Builder Dividend Safety for ILPT is rated at A, but that is cold comfort, considering the yield is a miserable 1.01% on a 10% payout ratio. Most other industrials are known for their superb dividend growth rates. By contrast, this company slashed its dividend to a mere penny per quarter in mid-2022, and it has remained there ever since.   Ticker Div. Safety Div. Yield Div. Growth Payout Div. Score   ILPT A 1.01% (-58.3)% 10% 0.08   Sector average C 3.58% 16.2% 71%     Click to enlarge Source: Seeking Alpha Premium, Hoya Capital Income Builder, and author calculations In a sector characterized by pricey companies that are still considered bargains by Hoya Capital Income Builder, ILPT is dirt cheap at 8.0x FFO, yet still overpriced by 9.1%. Even the short sellers are not interested in this company.   Ticker Price/FFO Premium to Target Price Short % Short Ratio   ILPT 8.0 9.1% 1.44% 1.76%   Sector average 19.8 (-13.4)% 1.37% 2.67%   Click to enlarge Source: Hoya Capital Income Builder   Uniti Group Uniti Group (UNIT) is by far the smallest of the Cell Tower REITs, with a market cap of $0.78B. The company is laboring under an 81% debt ratio, and while Debt/EBITDA is a healthy 5.7, it will not remain so for long, if FFO slides by (-25.9)% as projected.   Ticker Debt Ratio Debt/EBITDA Var. Rate % Fwd FFO Growth *   UNIT 81% 5.7 2.9% (-25.9)%   Sector average 34% 6.8 4.3% (-0.73)%   Click to enlarge Source: Hoya Capital Income Builder UNIT is a classic mousetrap. The grossly out-of-proportion yield of 18.38% is a dead giveaway, especially when coupled with a high likelihood of significant FFO decline. The dividend cut could be any day now.   Ticker Div. Safety Div. Yield Div. Growth Payout Div. Score   UNIT F 18.38% 6.30 40% 22.95   Sector average C 4.18 7.8 67% 5.24   Click to enlarge Source: Seeking Alpha Premium, Hoya Capital Income Builder, and author calculations UNIT share are dirt cheap at 5.5x FFO, and short sellers are putting mild pressure on the share price. Hoya Capital considers the company to be a bargain, so after the likely dividend cut, you might want to buy back in.   Ticker Price/FFO Premium to Target Price Short % Short Ratio   UNIT 5.5 (-42.9)% 6.70% 2.67%   Sector average 17.2 (-23.3)% 1.28% 1.78%   Click to enlarge Source: Hoya Capital Income Builder   Farmland Partners Although Farmland Partners (FPI) carries a respectable debt ratio of 34%, the company's debt/EBITDA is a dismal 14.7, significantly worse than even the bloated sector average of 10.9. FPI carries double the average load of variable rate obligations, and FFO for 2024 is projected to be unchanged from 2023.   Ticker Debt Ratio Debt/EBITDA Var. Rate % Fwd FFO Growth *   FPI 34% 14.7 7.5% 0.0   Sector average 36% 10.9 3.8% 0.8   Click to enlarge Source: Hoya Capital Income Builder FPI pays a weak dividend yield of just 2.18%. Thanks to a special dividend last December, its divvy growth rate looks great, at 22.5%, but still is not enough to lift the dividend score up to the overall REIT average, much less the no-risk rate on U.S. treasuries. Meanwhile, the Dividend Safety grade is F, indicating imminent danger of a cut.   Ticker Div. Safety Div. Yield Div. Growth Payout Div. Score   FPI F 2.18% 22.5% 160% 4.13   Sector average F 3.20% 2.2% 125% 3.42   Click to enlarge Source: Seeking Alpha Premium, Hoya Capital Income Builder, and author calculations FPI is overpriced across the board, with a stratospheric 43.0x price/FFO ratio, and shares are selling for fully 34.1% above the target price. Shares are also heavily shorted, at double to triple the rate of its nearest competitor, creating a headwind for price.   Ticker Price/FFO Premium to Target Price Short % Short Ratio   FPI 43.0 34.1% 7.76% 10.95%   Sector average 30.8 5.4% 4.64% 7.03%   Click to enlarge Source: Hoya Capital Income Builder FPI investors will say that buying shares is not a play on the company's income or dividend stream, but on the value of the land itself. Fine, if you want to speculate on farmland, go ahead, but even so, there is a better choice available.   Clear Channel Outdoor Clear Channel Outdoor Holdings (CCO) is a billboard REIT, in business since 2018. It is a small cap at $0.67B, lugging a crushing 92% debt ratio, with 31.2% of that debt held at variable rates, strangling the already very weak revenues (debt/EBITDA of 13.4). Although FFO per share is expected to improve somewhat this year, it is still projected to be less than zero. All these data points are dramatically worse than the sector averages.   Ticker Debt Ratio Debt/EBITDA Var. Rate % Fwd FFO Growth *   CCO 92% 13.4 31.2% NA   Sector average 38% 7.6 11.3% 2.0%   Click to enlarge Source: Hoya Capital Income Builder CCO does not pay a dividend and never has.   Ticker Div. Safety Div. Yield Div. Growth Payout Div. Score   CCO NA 0.0% 0.0% 0% 0.00   Sector average C 5.40 4.7% 68% 6.20   Click to enlarge Source: Seeking Alpha Premium, Hoya Capital Income Builder, and author calculations Investors in CCO are rewarded only through share price gain, yet CCO shares are worth less than half their IPO selling price, and the future is not exactly promising. Seeking Alpha Premium Since FFO per share is negative, and expected to remain so throughout 2024, Price/FFO and target price cannot be meaningfully computed. In the meantime, shares of CCO are heavily shorted, providing gale-force headwinds for share price.   Ticker Price/FFO Premium to Target Price Short % Short Ratio   CCO NA NA 10.54% 23.17%   Sector average 13.6 (-14.7)% 2.97% 4.02%   Click to enlarge Source: Hoya Capital Income Builder   Presidio Property Trust Presidio Property Trust (SQFT) is a micro-mini-itsy-bitsy REIT (market cap $0.01 billion) that owns a polyglot of office, retail, medical, industrial, self-storage, and residential properties. Their most lucrative niche consists of buying model homes and triple-net leasing them back to the builder. SQFT labors under a heavy 74% debt ratio, with debt/EBITDA at a truly pitiful 45.3. Like CCO, it is expected to improve its FFO significantly in 2024, but still end up below zero. Since SQFT doesn't really belong in any particular sector, meaningful sector averages cannot be provided.   Ticker Debt Ratio Debt/EBITDA Var. Rate % Fwd FFO Growth *   SQFT 74% 45.3 NA NA   Sector average NA NA NA NA   Click to enlarge Source: Hoya Capital Income Builder SQFT ceased paying quarterly dividends at the beginning of this year. Yet another red flag.   Ticker Div. Safety Div. Yield Div. Growth Payout Div. Score   SQFT NA 0.00% (-100)% NA 0.0   Sector average NA NA NA NA NA   Click to enlarge Source: Seeking Alpha Premium, Hoya Capital Income Builder, and author calculations Because FFO is negative, price/FFO and target price cannot be meaningfully computed. Even short sellers are not very interested in this company.   Ticker Price/FFO Premium to Target Price Short % Short Ratio   SQFT NA NA 0.68% 2.43%   Sector average NA NA NA NA   Click to enlarge Source: Hoya Capital Income Builder Investor's bottom line Any company is more than just its numbers. A reasonable Hold case probably could be made for some, if not all, of these companies. However, houses built on weak foundations suffer the most damage in a storm. Only the strong will survive the storm that appears to be coming to REITworld. The first step in preparing is to get rid of the flimsy firms. Two to five years from now, you will likely be glad you did.  Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"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":"4.28.3","shortVersion":"4.28.3","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/2442449438"}