With hopes for lower interest rates and normalizing economic conditions, real estate investment trusts (REITs) have been moving higher. However, as macro uncertainties mount, there are now plenty of REITs to avoid in August. After all, REITs are highly sensitive to interest rates (rising when rates fall, sinking when rates rise). Plus, if it turns out the market has prematurely priced in the prospect of a Federal Reserve pivot on interest rates, REITs could give back many of their recent gains.
In addition, classes of real estate, such as shopping malls and office buildings, continue to face big demand headwinds. This could mean additional pressure ahead for REITs with exposure to these areas of real estate. With bearish sentiment emerging, investors may want to tread carefully in the sector, which includes these seven REITs to avoid in August.
Arbor Realty Trust (ABR)
Arbor Realty Trust (NYSE:ABR) is a mortgage REIT (or mREIT). Instead of buying physical buildings, mREITs invest in mortgages backed by real property. Like their regular mortgage counterparts, mREITs have been hit hard by economic challenges over the past two years.
However, it’s not just uncertainty over interest rates that makes ABR stock a risky prospect. Back in May, Investorplace’s Ian Bezek argued that Arbor, with its focus on bridge loans, is at risk of big price declines, which more than counter ABR’s double-digit dividend yield.
ABR shares have made a big move higher since then, but if anything, if you are looking to avoid REITs before the crash, this name belongs at the top of your sell list. In his double-downgrade of ABR last month, Piper Sandler analyst Crispin Love argued that this mREIT has become overvalued compared to peers, and concerns about its loan portfolio remain.
Easterly Government Properties (DEA)
Easterly Government Properties (NYSE:DEA), which owns and leases office space to the U.S. federal government, also makes the list of top REITs to avoid in August. I have argued for such a case before when talking about a similar name, Corporate Office Properties Trust (NYSE:OFC). The OFC REIT leases out space to government agencies and contractors, which, thanks to security requirements, are less able to shift to a permanently-remote workforce.
Yet while we’ll probably never see a fully remote government workforce, government agencies can still (in an effort to cut costs) consolidate and close offices. As a Seeking Alpha commentator recently pointed out, this could spell doom for DEA stock. Per the commentator, a decrease in lease renewals could lead to a dividend cut, causing Easterly shares to decline in price.
Global Net Lease (GNL)
I’ve previously made the bear case for Global Net Lease (NYSE:GNL). Despite the potential for cost savings from its pending merger with Necessity Retail REIT (NASDAQ:RTL), GNL remains at risk of a dividend cut because of declining cash flow.
This key issue remains, as seen in GNL’s latest quarterly earnings release. Although much of its reported decline in core funds from operations (or FFO) was due to one-time expenses related to the Necessity Retail merger (set to close in Sept.), even on an adjusted basis, FFO declined compared to the prior year’s quarter.
It may look tempting to buy GNL stock, given its 14.4% dividend yield, and the potential for the merger deal to save the day. Yet given the high uncertainty with this “best case scenario” playing out, consider this one of the worst REITs for Aug. and stay away.
Hudson Pacific Properties (HPP)
As InvestorPlace’s Will Ashworth pointed out in June, property diversification has been more like “diworsification” for Hudson Pacific Properties (NYSE:HPP) this year. Remote working trends keep hurting the performance of this REITs office portfolio.
Meanwhile, Hollywood union strikes are a big near-term headwind for HPP’s portfolio of sound stages and film/TV production facilities. Yet, while this REIT’s management has seemingly assuaged strike-related concerns among HPP stock investors, given HPP’s recent post-earnings surge, it may be best to still consider this one of the REITs to avoid in Aug.
Things may not be getting worse for Hudson Pacific’s studio portfolio, but as the situation worsens for its office portfolio (last quarter, occupancy fell to 85.6%, versus 91.2% in the prior year’s quarter), HPP (at around $6.50 per share) could sink back to its 52-week low ($4.05 per share), or perhaps even lower.
Medical Properties Trust (MPW)
Medical Properties Trust (NYSE:MPW) has been popular among some speculators over the last year. Traders have been wagering that the short side’s bearish argument about this hospital facility owner will prove to be overblown.
If this happens, the speculators believe that MPW stock could surge on a short squeeze. Yet, based on the Medical Properties Trust’s latest quarterly results, you may not want to bet against the “smart money” on the short side here. Shares fell more than 14% following the earnings release.
Besides reporting mixed results for the preceding quarter, updates regarding issues with one of MPW’s main tenants (Steward Health Care System) suggest this big risk for the REIT is far from going away anytime soon. As trouble keeps looming over Medical Properties Trust, take heed of the market’s latest reaction to earnings, and stay away.
Paramount Group (PGRE)
Paramount Group (NYSE:PGRE) has been one of the top REITs to avoid this year. This real estate investment trust is focused on ownership of office buildings in New York and San Francisco. The impact of remote work on office demand has been especially high in both areas. That’s not all. As I’ve pointed out before, Paramount Group has had some large, high-profile tenant losses in recent months. The latest results from the REIT underscore the impact of these tenant losses on operating performance.
Last quarter, FFO fell by nearly 28% year-over-year, and the REIT reported a higher-than-expected net loss for the period. Although PGRE is cheap, trading for less than a third of book value, until interest rates fall/demand for downtown office space improves, it’ll likely stay a poor former.
Vornado Realty Trust (VNO)
Vornado Realty Trust (NYSE:VNO) is another office-focused REIT with high New York exposure. Hence, VNO has also experienced similar issues with its financial performance that we’re seeing with Paramount Group.
In contrast to PGRE, VNO has nearly doubled in price since May. At first, due to rising turnaround hopes, and announced asset sales. Then, more recently, due to the reporting of solid (considering the circumstances) quarterly results has moved shares even higher. Yet while the market today may believe Vornado will continue to turn a corner, it may be best to think otherwise.
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.
