Real estate investment trusts (REITs) have been on a hot streak as of late. Designed as pass-through entities, REITs kick back much of their cash flows as high dividends. That fact has been great for investors looking for income as the Federal Reserve has kept interest rates in the basement.
So great, in fact, that the benchmark exchange-traded fund Vanguard REIT Index Fund (NYSEARCA:VNQ) is up about 12% over the last 52 weeks. And that return doesn’t included the ETF’s juicy dividend yield.
But as they say, “a rising tide lifts all boats.”
As investors have clamored for all matter of REITs, some less-than-desirable stocks have seen their share prices increase with the rest. That’s a problem, as many of these REITs have plenty of internal problems that make them big-time “sells.” Point blank, they should be avoided at all costs.
For investors, knowing which REITs to avoid like the plague is equally as important as knowing which REITs to buy. Luckily, here at InvestorPlace.com, we’ve done some of the leg work for you.
Here are three REITs that deserve to be in the sell pile.
REITs to Sell: CBL & Associates Properties (CBL)
For those REITs that own lower-quality shopping malls, these are certainly are dark times. E-commerce and online shopping is finally starting to eat traditional brick & mortar stores’ lunch. Big-time mall staples like Macy’s Inc (NYSE:M) have announced large swaths of store closings. Retail bankruptcies are becoming commonplace. Foot traffic is down and so are sales-per-square-foot metrics.
All of this is a big issue if you’re CBL & Associates Properties, Inc. (NYSE:CBL).
CBL has always been an “ugly duckling” when it comes to mall REITs and has offered one of the highest dividends in the sector — currently north of 8%. Backing that dividend was a portfolio of 140 regional malls. The problem is that those regional malls are the kind that are getting kicked in the teeth by changing retail dynamics. Over the last year, CBL’s sales per square foot hasn’t really budged. In fact, it only really moved thanks to sales of very-low-quality assets.
Given the long-term trends in retail and malls, CBL’s position is certainly troubling … as are its debts of twice its market cap.
Shares of CBL have gotten a recent boost, thanks to a positive outcome of an SEC investigation. That provides the perfect exit for investors.
In the end, there are plenty of other mall REITs with better portfolios that have the goods to keep on thriving.
REITs to Sell: Corrections Corp of America (CXW)
The REITs such as Corrections Corp of America (NYSE:CXW) that run/own private prisons received their doomsday moment back in August. It was then that the U.S. Department of Justice said it would end the use of such private facilities and would not renew contracts as they expired. Needless to say, CXW and its fellow prison REITs plunged on the news.
But that’s only half the story. The other half is on the state level.
Presidential hopeful Hillary Clinton has already called on states to abolish the use of private prisons, while mega-pensions like CalPERS and University of California’s endowments have been selling shares and pushing lawmakers to end their usage. Additionally, changes in sentencing and family detention dynamics have already sent less inmates towards the private prison system.
Continued public outrage of CXW and its kind could be the final straw. CXW recently announced that it will be laying off staff, reducing costs and potentially closing/selling off facilities. That could be the start of the long death spiral for the prison firm.
At the end of the day, investors look towards REITs — and their dividends — to be secured by long-term tenants and cash flows. In the case of Corrections Corp., that’s no longer the story. It’s time to move on to greener REIT pastures.
REITs to Sell: Liberty Property Trust (LPT)
The name of the game for REITs is their juicy dividends. So when a company even hints that the dividend may be toast, it’s time to go. And that’s the case with Liberty Property Trust (NYSE:LPT).
LPT focuses its attention on industrial and warehouse space. It owns roughly 104 million square feet of industrial and office space throughout the United States and the United Kingdom.
The problem for Liberty is that no one uses suburban offices anymore. During the recession, that caused LPT to cut its dividend and the firm hasn’t raised it since then.
In order to combat that, Liberty has begun to redesign its portfolio and focus solely on industrial and warehouse properties. It has sold off plenty of its office space and has undergone a redevelopment program to add industrial spaces to its mix.
The issue now is twofold: one it’s expensive and two, it’s going to have a much smaller portfolio of properties producing cash flows at the REIT. Given that LPT is already having trouble covering its dividend from cash flows, this is troubling. It’s so troubling, in fact, that during the last earnings announcement, management at the REIT basically said that they were reevaluating LPT’s dividend policy and could see it dropping to $1.60 to $1.70 per share. That’s down from $1.90.
Not only have investors not gotten a dividend increase since the recession, but now they could get another cut. LPT is definitely one REIT they should walk away from.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.