Just as there are REITs to buy, there are REITs to sell in September. Some of these stocks are no longer in favor due to changes in how we fundamentally navigate through society. One example is the shrinkage of mall foot traffic in favor of e-commerce. Others deserve this title since they’re inherently risky with high debt and volatile cash flows.
The fate of other REITs to sell is decided by today’s macro backdrop. High-interest rates will likely stay for the time being. Inflation is also a persistent issue. Although this backdrop might not be the sole or even primary cause of a sell recommendation, when seen along with other company-specific and macro-risks, one is able to argue the case effectively.
So, if you’re curious about the REITs to sell in September, read on.
Broadmark Realty Capital (BRMK)
Broadmark Realty Capital (NYSE:BRMK) is a mortgage REIT specializing in hard money lending, with most of its loans backed by residential properties. They are known for charging double-digit interest rates due to the inherent risks associated with hard money loans.
The reported mixed Q1 2023 financial results, highlighting a GAAP net income of $4.6 million, which was negatively impacted by one-time merger-related expenses and impairment on the company’s real property owned, totaling $5.9 million. BRMK also noted a significant increase in defaulted loans, with $43.9 million of loans entering default during the quarter.
Another reason making BRMK one of those REITs to sell is that it was originally two entities: Broadmark and Ready Capital. Broadmark was suffering financially with inconsistent cash flows and other risks. Therefore, its future is more uncertain, warranting a sell recommendation from me at the current time.
Iron Mountain (IRM)
Iron Mountain (NYSE:IRM) is primarily known for its paper storage business but has been diversifying into the data center business.
While the company’s share price has remained stable, the majority of its business is still in paper storage, which has an uncertain future. The market currently prices IRM at a premium, overlooking the potential long-term decline of the paper storage sector.
IRM stock also underperformed drastically on several key financial metrics last quarter. Net income for the second quarter dropped to $1.1 million from $201.9 million in the same period of 2022. Service revenue decreased by 1.0% due to component price declines. FFO (Normalized) per share for the second quarter decreased to $0.71 from $0.74 in 2022.
These numbers wouldn’t be so alarming if it already had a robust business model. But paper storage is a declining business. Environmental concerns have put pressure on consumers as well as companies to diversify into cloud solutions over physical spaces to store documents. Also, its share price rally may not be strictly logical when seen through the lens of its short-term results. Therefore, I think giving IRM stock a sell recommendation is valid.
Invesco Mortgage Capital (IVR)
Invesco Mortgage Capital (NYSE:IVR) is a mortgage REIT known for its high dividend yield. In recent quarters, IVR recorded net losses and also reduced its dividend. The company underwent a 10-for-1 reverse stock split in 2022. While that increased the stock price, it also highlighted the company’s challenges. IVR’s high yield comes with the risk of ongoing share price declines and potential further dividend cuts.
I think IVR is a classic case of why investors shouldn’t chase yield. A high yield may prompt investors to buy it, increasing its share price and sending its valuation into even further illogical territory. Income investors, and especially those who are on a budget, may feel like they’re forced to make decisions such as these, but the risk is rarely worth it when weighed against steep capital depreciation and cuts to dividends.
The company reported Q2 2023 earnings of $1.45 per share, with revenues of $12.4 million, missing estimates by $59.1 million. Compared to the same quarter last year, the company’s revenue significantly decreased from $41.1 million. Wall Street analysts’ average recommendation for the stock is a Sell.
On the date of publication, Matthew Farley did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
