This year, the stock market adage “sell in May and go away” may hold very true, especially when it comes to the real estate investment trusts (REITs) best categorized as REITs to sell.
These are the REITs that are facing the greatest challenges from the two major factors affecting the sector. The first of these two major factors is the prospect of “higher for longer” interest rates persisting through the rest of 2024 and into 2025.
REITs across the board are typically interest-rate sensitive, but some have been particularly affected by higher rates. Even some real estate investment trusts less affected by high rates operationally could still find their respective valuations under pressure because of it.
Secondly, there are REITs still dealing with the “office real estate apocalypse,” or the softening of demand for commercial office space. The pandemic may be over, but the “new normal” in remote work doesn’t appear likely to fully revert to the “old normal.” This is bad news for many office REITs, including those that own trophy properties in major metro markets.
The following seven REITs to sell fall into either of these categories. If you currently own any of them, now’s the time to bail.
Blackstone Mortgage Trust (BXMT)
Blackstone Mortgage Trust (NYSE:BXMT) is a mortgage REIT that specializes in owning senior floating rate mortgages on commercial properties. Mortgage REITs were affected by the sharp rise in interest rates during 2022 and 2023, and again have been under pressure on the “higher for longer” news.
Even as its floating rate portfolio hasn’t been directly squeezed by rising rates, BXMT stock is not out of the woods. Why? Declining commercial real estate valuations have resulted in the REIT increasing loan loss provisions. This has outweighed the impact of increased net interest margin.
That’s not all. As Muddy Waters’ Carson Block argued last month, the commercial real estate downturn may still only be in “early innings.” The vocal short seller believes that commercial real estate will face further distress. This will require even more loan loss provisions, and may even result in a dividend cut. As trouble continues, avoid BXMT.
Global Net Lease (GNL)
I’m not alone in holding a bearish view on Global Net Lease (NYSE:GNL). Other than my past coverage of REITs to sell, so too have my InvestorPlace colleagues Muslim Farooque and Matthew Farley.
What makes GNL stock a steer-clear situation? Three key issues. For one, while this REIT has recently reduced its dividend, sustaining its new 15.36% forward yield will require all of its funds from operations (FFO) and a little bit extra. This brings us to point two, uncertainty about possible further declines in FFO. given that 20% of its portfolio is made up of single-tenant office buildings, which may carry elevated levels of vacancy risk.
Third, Global Net Lease is scrambling to de-lever, as debt maturities loom. While not certain, GNL may have to sell more shares as part of the efforts. The resultant shareholder dilution could place more pressure on shares.
Granite Point Mortgage Trust (GPMT)
Granite Point Mortgage Trust (NYSE:GPMT) makes and holds floating-rate commercial mortgages. Just like BXMT, this mortgage REIT is contending with growing loan loss provisions. Granite Point has already slashed its quarterly dividend several times since 2021. The most recent reduction happened in March when the dividend was cut from 20 cents to 15 cents per share.
Further cuts may be ahead, highlighting the high risk of buying GPMT stock to collect its current forward yield of 13.6%. As Seeking Alpha commentator David Ksir argued two months back, even as shares trade at a big discount to net asset value, another dividend cut would likely place more pressure on shares.
Don’t get me wrong. Among mortgage REITs, there are some opportunities for those knowledgeable about this niche area of the sector. However, there are far more “stay away” scenarios, and this is yet another high profile one.
NexPoint Real Estate Finance (NREF)
NexPoint Real Estate Finance (NYSE:NREF) is another one of the mortgage REITs to sell. However, unlike BXMT and GPMT, NREF has a more diversified portfolio of commercial real estate investments.
NexPoint’s portfolio includes senior mortgages, mezzanine loans, convertible loans, and equity investment. This mortgage REIT even owns two commercial real estate properties outright. Even so, this diversified strategy isn’t doing much to counter the headwinds currently affecting the industry.
High-interest rates have put the squeeze on net interest income. As NexPoint discussed in its quarterly earnings release, cash available for distribution is expected to drop from 60 cents last quarter to 40 cents this quarter. This points to the REIT lowering its dividend once again, just as it did at the start of this year. Although a 15.1% dividend may seem like it counters these high risks, NREF stock appears more like a yield trap than a high-yield value play.
Orion Office REIT (ONL)
Orion Office REIT (NYSE:ONL) is another REIT I’ve been bearish on for many of the same reasons I am bearish on GNL. Spun off from blue-chip REIT Realty Income (NYSE:O) in 2021, Orion Office REIT owns single-tenant net lease office properties, primarily in suburban markets.
ONL stock has pulled back considerably over the past year. The market has become more downbeat about Orion’s prospects. Even as management has been working to stabilize the REIT via the sale of vacant properties, they have made little progress in improving the overall vacancy rate.
As noted previously, a large portion of ONL’s leases are soon expiring. Only 70.6% of the REIT’s overall square footage is leased out to investment-grade tenants. Until big improvements arrive, confidence in ONL is likely to keep on dropping. The resultant price declines could outweigh the upside from the stock’s 11.59% forward dividend.
Office Properties Income Trust (OPI)
Office Properties Income Trust (NASDAQ:OPI) has experienced a sharp rebound since the office REIT’s latest quarterly earnings release. As InvestorPlace Earnings reported, OPI reported mixed results for the March quarter. While beating on revenue, earnings fell short of analyst estimates.
However, with earnings, investors focused more on upbeat updates regarding leasing. Namely, that around 488,000 square feet of space had been leased out at rates 10.2% above that of prior rates for the same space. Still, while OPI stock surged on this news, big issues remain.
At least, based on other takeaways one can infer from the earnings release. Vacancy rates continue to climb. Nearly 30% of outstanding leases expire within the next two years. OPI also has around $650 million in unsecured debt that matures in 2025. To pay this down, the REIT may need to refinance it, at a higher interest rate.
Uniti Group (UNIT)
It’s easy to see why Uniti Group (NASDAQ:UNIT) has become one of the REITs to sell. It all has to do with a recent announcement. Last week, this owner of “mission critical” telecom infrastructure assets agreed to a merger with its former corporate parent, Windstream.
This transaction will undoubtedly bring an end to Uniti’s REIT status. This is why UNIT stock has sold off tremendously. The market is anticipating a substantial cut or full elimination of its dividend. If you are a REIT investor, there is now little reason to own Uniti Group shares anymore.
Even if you’re thinking of buying UNIT, as a wager on a turnaround for the reunited company, that may not be a great idea, either. For now, well before the turnaround begins, much less takes shape, the dividend investor exodus out of Uniti may mean additional declines in the months ahead.
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.
