3 Doomed REITs to Dump Before They Dive: February 2024
The upheavals of 2023 rattled the housing market, witnessing soaring mortgage rates and stalled sales. In short, it created uncertainty for real estate investment trusts (REITs). Wary of the lurking doomed REITs, investors are now scrutinizing their portfolios. And they stand poised to pivot as the market sends signals of impending shifts. A silver lining emerges with mortgage rates finally relenting and a subtle yet promising upswing in home sales.
So, REITs continue to linger in the shadows. They trade at a median discount of 15.8% to their net asset value, underscoring a market still entrenched in caution. However, this careful optimism is not without its caveats. As the year unfolds, the specter of an election looms, threatening to inject volatility into an already fragile market.
In this crucible of change, investors stand at a crossroads, tasked with distinguishing these three REITs from the valuable ones.
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Hudson Pacific Properties (HPP)
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Hudson Pacific Properties (NYSE:HPP) navigates through turbulent waters, marked by a troubling Altman Z score of 0.23, signaling financial peril.
The company’s plight is visible in its office segment. It grapples with dwindling revenues and a studio segment burdened by soaring operating costs. This financial pressure is intensified by a significant 31% drop in stock value from the previous year.
Moreover, HPP faces crucial challenges of declining occupancy rates. Further, an imminent wave of lease expirations poses a substantial threat to future sales and overall financial stability. Adding to HPP’s predicaments, the company’s third-quarter financials echo this distressing narrative. Revenues were nosediving 11.1% year over year (YOY) to $231.4 million and missing estimates by $3.5 million.
Additionally, external forces further cloud HPP’s horizon. The burgeoning work-from-home trend casts a long shadow over its office portfolio. Also, the Hollywood union strikes in 2023 delivered a heavy blow to its sound stages and production facilities.
Medical Properties Trust (MPW)
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Medical Properties Trust (NYSE:MPW), long viewed skeptically, epitomizes the volatility inherent in the REIT sector. The narrative of MPW’s decline is stark, marked by a steep 75.2% plunge over the past year. Key to this downturn was a significant dividend cut last August, signaling deep-seated financial distress and casting a pall over its future prospects.
Despite the severe setback, MPW’s narrative is nuanced. The REIT currently boasts a high forward yield of 18.93%, a figure inflated in the wake of its sell-off and dividend reduction. However, this seemingly attractive yield is laden with challenges, particularly for those shorting the stock. MPW’s struggle to cover this substantial dividend amidst ongoing tenant issues adds layers of complexity to its already tenuous position.
In this context, caution remains paramount. While MPW’s high yield may be tempting, the specter of further dividend cuts looms large, threatening to propel the stock into another round of crippling price drop.
Orion Office REIT (ONL)
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Since its spinoff from Realty Income (NYSE:O) in late 2021, Orion Office REIT (NYSE:ONL) has experienced a tumultuous journey, with shares plunging 50.21% YOY.
The potential for another downturn looms, especially considering ONL’s niche focus on single-tenant properties. This specialization exposes the REIT to heightened risks, particularly as a significant 27.2% of its leases are set to expire soon. Such a scenario could leave Orion grappling with the daunting task of either offloading or reimagining entire unoccupied office spaces.
At first glance, Orion’s valuation may seem enticingly low, trading at just a fraction of its book value. It has a seemingly attractive price-to-funds from operations (P/FFO) ratio of three and a forward yield of 8.35%.
However, this superficial affordability masks deeper concerns. The market’s decision to assign ONL such a distressed valuation is not without merit. Clearly, it reflects investor apprehension about the REIT’s capacity to weather potential occupancy rate declines and lease renewals in the current economic climate.
On the date of publication, Muslim Farooque did not have (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
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.
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