Investing in Real Estate Investment Trusts (REITs) is great if you’re in search of dividends. Moreover, numerous REITs have shed value since the turn of the year, suggesting a buying opportunity has emerged. All sounds good, doesn’t it? Not so fast. I urge investors to reconsider before committing capital to certain REITs to sell, as various risk factors have emerged.
A supply and demand imbalance has occurred, leading to a 20% year-over-year (YOY) drop in U.S. commercial real estate transactions. Commercial bank loan delinquency rates have also increased by approximately 22 basis points in the past twelve months, indicating that higher counterparty risk has emerged.
Apart from the above, the U.S. economy is experiencing stagflation and higher unemployment rates, contributing to a weaker supply and demand outlook. As such, there are numerous lower-quality REITs to sell, as they are at risk of underperforming.
With all that in mind, here are three REITs to sell.
Orion Office REIT (ONL)
Orion Office REIT (NYSE:ONL) is a single-tenant suburban office REIT. The fund has no sectoral tilt but is geographically oriented toward Texas, New York and New Jersey.
This REIT has shed nearly 50% of its market value in the past year, amplifying its forward dividend yield to 11.9%. Additionally, ONL REIT has a price-to-funds from operations ratio of merely 2.10x. Sounds good, right? Not exactly — here’s why.
ONL REIT’s occupancy rate of 75.8% is underwhelming compared to the NCREIF ODCE sampled industry average of 82.3%. Moreover, ONL REIT’s weighted average lease term of 4.1 years is much longer than its weighted average debt maturity schedule of 2.6 years, implying its refinancing risk is high.
Furthermore, Orion Office REIT’s growth seems stagnant. It has shown a lack of recent buying activity. In fact, it recently agreed to sell about $48.1 million worth of property. Moreover, ONL REIT faces structural concerns linked to the office REIT industry.
In essence, I think ONL REIT could be a value trap.
Farmland Partners (FPI)
Farmland Partners (NYSE:FPI) is an integrated agriculture investment company. The firm invests in farmland, facilitates loans, manages assets and auctions farmland. Although its integrated business model is commendable, I simply dislike farmland as an asset class and believe FPI REIT is in the firing line.
My first concern here is that FPI REIT is set for a restructuring. News recently broke that the fund appointed Susan Landi as Chief Financial Officer to implement a cost-cutting strategy. Landi’s appointment comes after FPI REIT reported $1.4 billion in first-quarter net income, a 17.9% YOY decrease.
Further, Farmland Partners’ book value has decreased to $1 billion from $1.14 billion a year ago. Sure, a large disposition played a part. However, given that broad-based inflation is slowing, I fail to see how FPI REIT will recoup its lost book value anytime soon.
On the plus side, FPI REIT’s first-quarter adjusted funds from operations (AFFO) per share doubled YOY to six cents per share. Nevertheless, the FPI REIT’s forward price-to-AFFO ratio of 52.34x suggests it is grossly overvalued.
Call me a pessimist, but I’m bearish!
Medical Properties Trust (MPW)
Medical Properties Trust (NYSE:MPW) has lost more than 45% of its market value in the past year and recently suffered another blow when RBC Capital downgraded it to sector perform.
RBC Capital thinks MPW REIT is a speculative asset with significant risks attached to it. I concur with RBC as I believe MPW REIT has ongoing risks. For example, MPW REIT’s largest tenant, Steward Health Care Systems, faces solvency challenges. Steward Health Care Systems recently won a Chapter 11 court battle, allowing it to access a $225 million credit line. However, its solvency issues stretch back a long way, adding an overhang to MPW REIT’s portfolio.
Furthermore, MPW REIT recently secured $800 million in debt financing to bolster its liquidity. Some might consider the financing deal to be beneficial to MPW REIT. However, I think it echoes the fragility of MPW REIT’s balance sheet, which has a debt-to-equity ratio of 1.5x.
I concede that MPW REIT’s price-to-AFFO of 4.45x and dividend yield of 12.47% are well-placed. However, I urge investors to avoid looking at these metrics at face value. I remain concerned by the REIT’s fundamentals and, therefore, hold a bearish view.
On the date of publication, Steve Booyens did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
