7 REITs to Sell Before They Crumble Under Pressure

Rising interest rates and the economic slowdown have already weighed on real estate investment trusts (REITs). Unfortunately, there are still plenty of REITs to sell before they drop even further. Although interest rates may not necessarily be on track to spike as sharply as they have over the past 18 months, worsening economic conditions may place more pressure on the sector.

As you’ve likely seen, there is plenty of chatter about a possible “commercial real estate crisis,” particularly with office properties. Demand for office space dipped during the pandemic and the move to hybrid/remote workplaces, but didn’t recover post-pandemic. More recently, the economic downturn has further dampened office space demand.

However, don’t assume it’s only office building REITs you need to steer clear of. There are plenty of lower-rated REITs to avoid owning other types of properties.

So, what are some of the REITs to sell before they drop? Avoid these seven, as numerous challenges weigh on the real estate sector.

Blackstone Mortgage Trust (BXMT)

Blackstone Mortgage Trust (NYSE:BXMT) is a mortgage REIT focused on investing in commercial mortgage loans. As I discussed last month, BXMT, along with a similar commercial mortgage REIT, Starwood Property Trust (NYSE:STWD), have become heavily shorted.

According to Bloomberg, short-sellers have upped their bearish bets against BXMT stock and STWD stock. Although both REITs hold portfolios of floating rate commercial mortgage securities (i.e. they benefit from rising interest rates), the short side believes this is one of the REITs expected to crumble under pressure, as landlord defaults lead to higher-than-expected loan losses.

Sure, this rising short interest has already pushed BXMT more than 40% lower in the past year. Many commentators now argue that potential loan losses are now largely priced-in. However, given the high uncertainty with commercial real estate, it may be wise to err on the side of caution and stay away.

Digital Realty Trust (DLR)

Since late May, Digital Realty Trust (NYSE:DLR) has bolted higher, as investors flock back to the REIT. All because DLR owns hundreds of data center properties across the United States and around the world. Chalk it up to the artificial intelligence (or AI) megatrend. “AI mania” has speculators betting that increased adoption of AI will boost demand for DLR’s properties, enabling this REIT to thrive despite the challenging macro environment.

However, not everyone holds this optimistic view. In fact, analysts at Hedgeye are pitching Digital Realty Trust as a short idea. Believing that DLR overpaid for many of its assets is much more capital-intensive compared to other REITs, and has an unsustainable rate of payout, the research firm argues that it is one of the REITs to sell before they drop, as a dividend cut may be inevitable.

Global Net Lease (GNL)

Global Net Lease (NYSE:GNL) has been one of the underperforming REITs to sell for quite some time. Still, many have been tempted to buy this REIT, which focuses on properties acquired through sale-leaseback transactions.

A big reason for this is the high forward yield of GNL stock. At current prices, this yield comes in at around 16.6%. However, it is very questionable whether GNL’s high payout is sustainable. Yes, Global Net Lease’s plans to merge with Necessity Retail REIT (NASDAQ:RTL) are expected to result in cost savings that will fall straight to the bottom line.

Even so, as I have pointed out previously, GNL’s funds from operations (or FFO) have been declining for several years. Declines could intensify if the real estate downturn continues. This could counter cost savings from this merger, leaving Global Net Lease still at risk of a dividend cut.

Hudson Pacific Properties (HPP)

One could call Hudson Pacific Properties (NYSE:HPP) a hybrid REIT. Alongside ownership of many office buildings in the Los Angeles and San Francisco metro areas, HPP owns several Hollywood film and TV production facilities, including the famed Sunset Bronson studios facility.

That said, this diversification isn’t doing much to help HPP stock. Work-from-home trends are affecting HPP’s office portfolio, and now the Writer’s Guild Strike (which has halted film/TV production) is now set to hurt the performance of its studio portfolio.

Down by more than 76.5% in the past year, it may seem like all of these issues are priced-in. Then again, maybe not. As a Seeking Alpha commentator argued recently, bankruptcy risk remains high, even after this REIT slashed its dividend. With all these challenges in mind, consider HPP one of the REITs to sell before they drop yet again.

Paramount Group (PGRE)

Paramount Group (NYSE:PGRE) owns a portfolio of Class A office buildings in New York and San Francisco. However, while its properties are high-quality, this is one of the lower-rated REITs to avoid. Why?

PGRE stock has tumbled from over $15 per share pre-pandemic to around $4.25 per share today. Much of these declines have been fueled by the work-from-home trend, which has severely affected demand in both of Paramount’s key markets. However, PGRE has experienced some other major issues.

As InvestorPlace’s Ian Bezek pointed out in May, the now-failed First Republic Bank (OTCMKTS:FRCB) was PGRE’s largest tenant. If office space demand remains weak, challenges could continue for Paramount. This REIT has leases covering millions of square footage that expire over the next few years. Even after falling into penny stock territory this year, further declines may be in store for PGRE shares.

Sabra Health Care REIT (SBRA)

Sabra Health Care REIT (NASDAQ:SBRA) owns a portfolio of skilled nursing facilities, senior housing communities, and other healthcare-related properties. With a double-digit dividend yield (10.76%), SBRA may look tempting to income-focused REIT investors.

However, SBRA stock is high-yield for a reason. Like other REITs operating in the skilled nursing/senior housing space, revenue and earnings dropped during the pandemic, and have yet to fully recover. While credit rating agencies like Fitch believe things are stabilizing at Sabra, further deterioration may not be out of the question.

SBRA hasn’t slashed its dividend since 2020, but it would likely need to slash its rate of payout again, if its operating performance worsens from here. With Sabra’s high yield its main appeal, any dividend reduction/suspension is likely to have a severe impact on the stock price. This makes SBRA one of the REITs to sell before they drop.

SL Green Realty (SLG)

Like PGRE, SL Green Realty (NYSE:SLG) is an office REIT with high New York City exposure. In fact, all of SL Green’s properties are located in the midtown and financial districts of Manhattan.

As InvestorPlace’s Alex Siriois argued last month, the failure of “return to office” initiatives has been bad news for this REIT, and for SLG stock. Rental income has declined, all while interest expense has nearly tripled. Average rents are trending lower, and SLG’s vacancy rate is trending higher.

These issues have already weighed on the performance of SLG. Shares have fallen by around a third since January alone, and have tumbled more than 60% over the past twelve months. The situation could get worse, as loan maturities loom. SLG will likely need to refinance much of its debt at higher rates, which as I’ve pointed out previously, could threaten SLG’s super-large dividend (14.4% forward yield).

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.