Shares in real estate investment trusts have bounced back in recent months, but as the commercial real estate space remains in a tough spot, there are still plenty of stocks in this category best described as REITs to sell.
The main reason for this all has to do with the macro environment. Interest rates remain high. The other factors driving the commercial real estate crisis, like falling demand for office space due to remote working, persist.
On top of these macro factors, many REITs are even contending with their own tenant-related headwinds. Put it all together, and barring something like a sudden decision by the Federal Reserve to lower interest rates, it’s hard to see the situation for these names improving soon.
Instead, each of these seven REITs to sell is likely to get knocked even lower because of worsening fiscal performance, or because of negative developments like dividend reductions/cuts.
Boston Properties (BXP)
‘Blue-chip REIT’ may be an apt descriptor for Boston Properties (NYSE:BXP). This office REIT owns high-end office buildings in “gateway” real estate markets, like New York, Boston, Washington, D.C., Los Angeles, and San Francisco.
But like other owners of class A office space, the aforementioned decline in office space demand remains a major risk for BXP stock. So far, this has resulted in declining funds from operations (the REIT version of earnings).
Worse yet, as Moody’s noted in a December downgrade of BXP’s debt, leases representing 14% of the REIT’s annualized revenue expire between now and 2025.
If weak office space demand affects lease renewals, a deterioration in results may be just around the corner. With this in mind, it’s best to sell/skip on BXP for now, even if other factors (like its 6.26% dividend) about it are appealing.
Diversified Healthcare Trust (DHC)
Shares in Diversified Healthcare Trust (NASDAQ:DHC), which owns health care and senior housing properties, are up by more than 60% over the past year.
However, most of these gains were accrued last summer, when the REIT canceled plans to merge with another of the REITs to sell (more below).
Since then, DHC stock has traded sideways, as this RMR Group (NASDAQ:RMR) managed REIT works to get its house in order. However, as a Seeking Alpha commentator argued in January, DHC has only two options to improve its balance sheet: asset sales, or the issuance of new shares.
Either option is bad news for DHC investors. Selling assets will of course affect cash flow. This may minimize the chances DHC’s quarterly dividend (now at a penny per share) gets re-raised. Selling new shares would mean dilution, which may send shares lower. Still in a tough spot, steer clear.
Global Net Lease (GNL)
Global Net Lease (NYSE:GNL) shares have declined steadily over the past five years. You may find this net lease REIT appealing, if only for its high forward dividend yield.
At current prices, GNL stock has a forward yield of 19.27%. However, as is often the case with REITs (or any stock) with a high dividend yield, there’s a good reason why the market has priced shares this way.
Not only are GNL’s quarterly dividends (totaling $1.42 per share annually) not covered by forecast funds from operations for 2024 ($1.09 per share).
As I’ve argued previously, GNL may have an inflated book value, and is at risk of price declines that far outweigh its big fat payout. While there may be a few high-yield REITs out there where yield outweighs the risks, that’s not the case for most of them, including Global Net Lease.
Medical Properties Trust (MPW)
I’ve long argued that Medical Properties Trust (NYSE:MPW) is one of the top REITs to sell. My bearishness has, for the most part, been to be the right call.
Shares slid sharply lower in 2023, as this hospital REIT has contended with a problem tenant, leading to significant dividend cuts.
More recently, however, MPW stock has been trending higher. Chalk this up to a well-received quarterly earnings release, which included promising updates regarding the problem tenant, as well as MPW’s efforts to improve its balance sheet.
Yet while some may think that Medical Properties Trust is making a comeback, err on the side of caution.
Assume MPW’s latest moves are merely a “dead cat bounce.” Why? Not completely out of the woods with its major issues, a surprise negative development, such as another dividend cut could cause Medical Properties Trust shares coughing back these latest gains.
Orion Office REIT (ONL)
Owners of high-quality, downtown office space like BXP had been hard hit by changing workplace trends, but for names like Orion Office REIT (NYSE:ONL), which owns suburban office properties in less glamorous locales, the situation has clearly hit crisis mode.
As InvestorPlace’s Steve Booyens argued last month, Orion Office is dealing with staggeringly-low occupancy rates (80.5%) for its properties. If that’s not bad enough, the REIT has a very leveraged balance sheet, and Orion’s portfolio has a weighted average remaining lease term of only 4 years.
A high proportion of leases are soon expiring. There’s high uncertainty over whether the REIT can find new tenants for these properties (which are primarily single tenant).
This leaves ONL stock (down 47.5% over the past year) at risk of further declines. Avoid/sell it, even as it has maintained its dividend, and currently has a forward yield of 11.7%.
Office Properties Income Trust (OPI)
As mentioned above, Office Properties Income Trust (NASDAQ:OPI) was going to merge with another of the REITs to sell, DHC, last year. Yet with this deal quashed by shareholders, this moribund REIT, also externally-managed by RMR Group, has been focusing on refinancing and asset sales in an effort to turn itself around.
Unfortunately, the odds may be stacked against an OPI stock comeback. As I’ve pointed out before, many factors point to a further deterioration of Office Properties Income Trust’s fiscal performance. These factors include not only the overarching office space demand trends, but also a tsunami of upcoming lease expirations.
Add in the fact that this REIT, like Diversified Healthcare Trust, has cut its quarterly dividend down to a penny per share, giving it a paltry forward yield of just 2.04%, there’s zero reason to waste your time (or risk your capital) on OPI shares.
Paramount Group (PGRE)
Paramount Group (NYSE:PGRE) is essentially a smaller version of Boston Properties, except with greater concentration in the New York and San Francisco office building markets.
Yes, PGRE stock has already crashed, due to high-profile lease expiration news.
For instance, this office REIT had the misfortune of being a landlord for not one, but two of the banks that failed during the 2023 regional banking crisis. Following PGRE’s slide into “penny stock territory” (under $5 per share), the stock is arguably now trading at a fire sale price.
However, in 2025 and 2026, leases covering a quarter of its total portfolio square footage expire. The REIT is having success finding new tenants, but at lower rents.
Analysts anticipate continued declines in PGRE’s funds from operations next year (from 74 cents to 64 cents per share). Until this trend reverses, shares are at risk of a continued slide in price.
On the date of publication, Thomas Niel 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.