As rate cut euphoria fades, and concerns about the commercial real estate crisis loom, consider it time to bail
Since November, excitement about lower interest rates has boosted interest-rate-sensitive stocks like real estate investment trusts (or REITs). However, as rate cut enthusiasm cools, now may be the time to determine what REITs to sell.
Yes, it’s not as if lower interest rates in 2024 are no longer on the table. A recent statement from one Federal Reserve official (Atlanta Fed President Raphael Bostic) suggests thatlower rates will begin to arrive later this year.
Rate cuts notwithstanding, chances are they will not solve a vital issue affecting office real estate since 2020: the move to remote and hybrid working environments for white-collar employees.
Although the real estate industry may be considered“one of the biggest societal problems we’re facing right now,”as Marc Holliday, CEO of office REITSL Green Realty, put it in a recent60 Minutespiece, this trend is not going away.
That’s not all. Other REIT types (healthcare, retail, specialty) face problems that lower interest rates cannot solve. Looking at names in the space that fit in either category, I have found the top seven REITs to sell.
CBL & Associates Properties (CBL)
CBL & AssociatesProperties(NYSE:CBL) is a retail REIT that owns 94 malls and shopping center properties across the United States. Hit hard by the pandemic and its impact on brick-and-mortar retail, CBLfiled for bankruptcy in November 2020.
However, within a year, the REIT quickly reorganized,exiting Chapter 11 a year later. CBL stock has delivered a mixed performance post-bankruptcy but has been trending higher lately, largely due to the specter of lower interest rates.
Yet, while now may seem like an opportune time to buy CBL, outside of its moderately high yield (6.1%), it may not have much else going for it. As aSeeking Alphacommentator recently argued, CBL haslimited upside potentialand is contending with still-high debt and the lower-quality nature of its portfolio. With this, it may not take much to drive an unexpected massive move lower for shares.
Highwoods Properties (HIW)
High exposure to the societal trends affecting office demand is what makesHighwoods Properties(NYSE:HIW) one of the top REITs to sell. This REIT owns downtown office buildings in numerous cities across the U.S. “sun belt.”
Yet while Highwoods is focused on properties in areas of the country experiencing higher levels of population growth, the long-term headwinds the office building space faces may far outweigh it. At least, that’s the takeaway from credit rating agencyS&P’srecent downgrade of Highwoods’ outlook from“stable” to “negative.”
S&P noted that Highwoods has an elevated lease expiration schedule, with leases covering nearly a quarter of its annualized rent expiring between now and 2025. Despite a high yield (9.2%), you may want to stay away from HIW stock, as further office demand challenges could cause it to cough back recent rate cut gains and then some.
Hudson Pacific Properties (HPP)
Last August,Hudson Pacific Properties(NYSE:HPP) was contending with theimpact of the Hollywood union strikeson leasing the REIT’s sound stage and film/TV production facilities.
Since then, Hollywood’s labor issues have been resolved, and media production is back in full swing. This, plus the interest rate news, has resulted in HPP stock more than doubling off its low. Yet, while it may appear that the future is getting brighter for Hudson Pacific, issues with its office portfolio have not gone away.
Occupancy rates for its office portfolio were at81.3%during Q3 2023 versus85.2%during Q2 2023. Last quarter, the positive impact of asset sales helped to outweigh this, but that may not be the case if occupancy rates continue to drop in the quarters ahead for this struggling REIT, which suspended its common stock dividend last year.
Medical Properties Trust (MPW)
Medical Properties Trust(NYSE:MPW) is another name that other commentators and I have consistently labeled as one of the REITs to sell. Admittedly, the time to avoid this healthcare REIT before it crashed and burned was quite a while ago.
Over the past year, MPW stock has collapsed to the tune of 77.2%. Chalk it up to a variety of negative developments, includinga major dividend cutlast August. Even so, just because Medical Properties Trust has already crashed and burned doesn’t mean the dust has truly settled.
Subsequent developments, such as another possible dividend cut or further troubles with its main problem tenant (Steward Health Care System), could result in further sharp price declines. As shares are again sporting a very high yield (around 19.5%)due to the latest sell-off, the best move is to stay away from this longtime “falling knife” situation.
Orion Office REIT (ONL)
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Spun offfromRealty Income(NYSE:O) in late 2021,Orion Office REIT(NYSE:ONL) shares have tanked from $25 to around $5 per share in a little over two years. However, another “crash and burn” round for this REIT is very possible.
One important thing to note about ONL stock is that this office REIT focuses on single-tenant properties. This may place Orion in a precarious position if occupancy rates drop this year as a large portion of its leases (27.2%) come due. The REIT may end up stuck trying to sell or reposition entire vacant office buildings.
While Orion may appear cheap on paper, trading for less than a third of its book value at a price-to-funds from operations (P/FFO) ratio of only 3, and with a forward yield of 7.91%, there’s ample reason why investors have de-priced ONL to such a distressed valuation.
Office Properties Income Trust (OPI)
Office Properties Income Trust(NASDAQ:OPI) is another office REIT focused on single-tenant properties. OPI has had a rough start this year, with shares dropping 37.6% on Jan. 11 alone. This big decline came upon news of the REIT slashing its quarterly dividend from 25 cents tojust a penny per share.
Although significantly reducing its payout to conserve cash was a prudent move, more trouble lay ahead for the REIT and for an occupancy rate of 93.3% may sound solid, but at the same time, it may prove fleeting.
Why? Per its latest investor presentation, leases coveringnearly 40%of Office Properties Income Trust’s leases expire between now and 2026. While government agencies make up a large portion of their tenant base, remember that even the U.S. Federal Government isweighing whether to reduce its leasing footprint.
Paramount Group (PGRE)
Paramount Group(NYSE:PGRE) is an office REIT focused on downtown New York and San Francisco properties. Previously, I’ve talked about the big risks with Paramount Group, particularly the REIT’stenant expiration issues.
PGRE stock has held steady for most of the past year, yet I wouldn’t assume it’s out of the woods and on its way to a recovery. Although hares briefly rallied on the interest rate news in November and December, occupancy-related concerns are coming off the back burner.
As discussed in Paramount Group’s latest investor presentation,many of its flagship propertiescontinue to have large-block vacancies. Leases covering more than a third of its total square footage are set to expire between now and 2026. Barring the sudden emergence of more favorable office building demand trends, keep PGRE on your “REITs to sell” list.
On the date of publication, Thomas Nieldid 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.comPublishing Guidelines.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
As an expert in real estate investment and market analysis, I bring a wealth of knowledge and experience to the table. My understanding of the dynamics within the real estate sector allows me to navigate through complex scenarios and identify key indicators that influence investment decisions. I have closely followed market trends, economic indicators, and the performance of various real estate investment trusts (REITs) over the years, making me well-equipped to analyze the content provided.
In the given article, the author discusses the impact of changing interest rates on REITs, particularly in light of the evolving landscape for commercial real estate. The central theme revolves around the potential challenges faced by different types of REITs, such as retail, office, healthcare, and specialty, and highlights seven specific REITs that may be worth considering selling.
Let's delve into the key concepts and information related to the mentioned REITs:
CBL & Associates Properties (CBL):
- Retail REIT that owns 94 malls and shopping center properties in the U.S.
- Filed for bankruptcy in November 2020 but quickly reorganized and exited Chapter 11.
- The stock has been influenced by lower interest rates, but concerns about limited upside potential, high debt, and lower-quality portfolio suggest caution.
Highwoods Properties (HIW):
- Owns downtown office buildings in U.S. "sun belt" cities.
- S&P downgraded Highwoods' outlook from "stable" to "negative" due to elevated lease expiration schedule and potential office demand challenges.
- Despite a high yield (9.2%), caution is advised due to long-term headwinds.
Hudson Pacific Properties (HPP):
- Faced challenges related to Hollywood union strikes impacting leasing of sound stage and film/TV production facilities.
- Stock doubled off its low after the resolution of labor issues, but issues with its office portfolio persist.
- Occupancy rates for its office portfolio may pose a concern.
Medical Properties Trust (MPW):
- Healthcare REIT that experienced a significant stock collapse (77.2%) over the past year.
- Major dividend cut in August raised concerns.
- Continued troubles with main tenant (Steward Health Care System) or another dividend cut could lead to further declines.
Orion Office REIT (ONL):
- Spun off from Realty Income in late 2021, focuses on single-tenant properties.
- Shares have experienced a significant decline.
- Potential challenges if occupancy rates drop, given a large portion of leases coming due.
Office Properties Income Trust (OPI):
- Office REIT focused on single-tenant properties.
- Experienced a sharp decline after slashing quarterly dividend.
- Caution advised due to a significant percentage of leases expiring in the coming years.
Paramount Group (PGRE):
- Office REIT with a focus on downtown New York and San Francisco properties.
- Previously highlighted tenant expiration issues.
- Concerns about large-block vacancies and leases expiring in the near future.
In summary, the article emphasizes the potential risks associated with holding these specific REITs in the current market conditions, considering factors such as lease expirations, occupancy rates, and broader industry trends. Investors are urged to exercise caution and evaluate the unique challenges each REIT faces before making investment decisions.