It would seem a good time for real estate investment trusts (REITs). The economy continues to recover, wage growth is happening and the biggest problem with the housing market seems to be the lack of available housing.
The worst appears to be over for the broader economy.
And even recent challenges like the demise of retail anchor stores in shopping malls are already transitioning to new opportunities and grocery stores and other high-traffic retail see the transition as an opportunity.
But there are some troubling signs with this recovery.
Real estate is a cyclical market, with fairly predictable ups and downs.
The challenge this time around is the “up” cycle is looking like it’s about to peak after a respectable nine-year run.
According to industry group REIT.com, however, commercial construction is in line with levels 20 years ago, yet the economy is more than 60% larger than it was back then.
That isn’t an encouraging sign. What’s more, Washington’s inability to set any economic trajectory means there’s as much risk as reward right now in REITs. You can’t blindly buy. Following are seven high-yield REITs that will break your portfolio if you are blinded simply by a juicy yield.
High-Yield REITs to Avoid: CBL & Associates (CBL)
CBL & Associates Properties, Inc. (NYSE:CBL) manages town centers with a focus on retail space. And given its recent second-quarter earnings, out Aug. 3, there is great consternation the past may well be prologue.
Net revenue was off 40% compared to the same quarter a year ago. And funds from operations (FFO), the true measure of a REIT’s profitability, was off 20%.
Obviously, the retail space has been tough. But CBL is now shuttering new projects and is showing slower traffic and revenue in its operations. This means growth is under pressure. And when stocks in a growth sector aren’t growing, the Street doesn’t treat them well.
Yes, CBL has a whopping 12% dividend yield. But the stock is off 26% year to date. There’s little reason to bet on this trend changing before the end of the year.
High-Yield REITs to Avoid: Pennsylvania R.E.I.T. (PEI)
Pennsylvania R.E.I.T. (NYSE:PEI), as its name suggests, has a pretty geographically focused portfolio of shopping malls, primarily in the Mid-Atlantic region.
This area — specifically New Jersey, Pennsylvania, Virginia and Maryland — is usually one of the more affluent regions in the country and one that tends to fall less in bad times and grow faster in good.
But this is also the demographic shopping more online as well. PEI is now trying to shift its retail focused malls into more diverse facilities with more to offer than just racks of clothes and shoes.
The dividend is a tempting 7.7%, but it’s because the stock has dropped nearly 43% year to date, not because it’s swimming in profits.
High-Yield REITs to Avoid: Rait Financial Trust (RAS)
Rait Financial Trust (NYSE:RAS) is a different kind of REIT than you usually think about when you shop for REITs. It provides financing for commercial real estate.
And in doing so, RAS also takes ownership of some of the properties.
Given the demand for new properties, you would think RAS is in the best side of this market. But that’s not the case. Growth at this point is very specific and you have to pick your spots very selectively.
Also, given the upheaval in many commercial retail properties, spending isn’t what it used to be, as companies are less interested in making new purchase decisions until the dust settle.
That explains why RAS is 63% year to date. Its 16% dividend yield is also becoming increasingly unstable.
High-Yield REITs to Avoid: Global Net Lease (GNL)
Global Net Lease Inc (NYSE:GNL) owns, manages and operates commercial buildings in the U.S. and Europe. Most of its operations are single-company buildings.
For example, its top tenant is FedEx Corporation (NYSE:FDX). GNL owns and operates buildings FDX uses for its distribution network. In this way, FDX doesn’t have to be in the commercial real estate business and can work with a partner who can buy or build the properties it needs in the right locations.
GNL makes it up to the tenants to pay for the taxes, insurance and maintenance on their buildings, which means less revenue for GNL but a lot less headache as well.
The problem is, this is a fairly leveraged approach in the REIT business and according to its Q2 numbers, while revenue was up, net income and FFO are falling significantly.
Off almost 11% year to date, GNL’s 10% dividend may be at risk of a cut if things don’t turn around soon.
High-Yield REITs to Avoid: New York REIT Inc (NYRT)
New York REIT Inc (NYSE:NYRT) was an office-focused REIT built to take advantage of the distressed properties (office and retail) in New York City during the 2008 financial crisis. It went public in 2014 but has little to show for its “buy the bottom” strategy. As a matter of fact, it has been surprisingly volatile.
Regardless of its past performance, its current predicament is the real issue. NYRT is currently in the process of liquidating its current portfolio. If you’re in the real estate business and you’re looking to make money by selling all your properties, it’s likely you won’t be in the business much longer. And if you are, it’s not the kind of investment most people are looking to join.
NYRT is off nearly 18% year to date, so its attractive 5.5% dividend means little.
High-Yield REITs to Avoid: Kimco (KIM)
Kimco Realty Corp (NYSE:KIM) is one of the largest open air shopping mall owners in the U.S. It has 510 malls, with more than 4,000 tenants open in the top metropolitan markets. That adds up to more than 84 million square feet of space in 32 states, Puerto Rico and Canada.
The problem is, no matter how diversified KIM might be geographically, it’s in the one sector having the toughest time right now — retail. As of its Q2 numbers in late July, KIM isn’t in terrible shape. It’s FFO and revenues are good, net income is a little weak, but not anything to lose sleep over. The challenge is if it can keep up with the transitioning retail dynamics from brick-and-mortar to online.
Its selling properties, and it issued a new preferred stock for financing and ostensibly to retire older debt. But these efforts can become more burdens than advantages.
Off 20% year-to-date, its 5% dividend just isn’t worth the looming challenges in the sector.
High-Yield REITs to Avoid: DDR Corp (DDR)
DDR Corp (NYSE:DDR) is another open air shopping center REIT that, along with the typical troubles of brick and mortar retail, also has a few other problems to add to it.
First, its management team keeps changing. A new one just took the helm in late July. The problem with continual changes in management is there is no long-term expectation and, in the short term, tactics vary. This can be a convenient cover for a struggling company seeking the image of a competent company while simply kicking the can down the road.
Second, its core tenants — TJX Companies Inc (NYSE:TJX), Wal-Mart Stores Inc (NYSE:WMT) and PetSmart, Inc. (NASDAQ:PETM) — are focused on a price-sensitive consumer who isn’t really back in the spending game. And WMT is in the process of closing stores, rather than opening them.
Third, almost 15% of DDR net operating income comes from the beleaguered economy of Puerto Rico. Some point to its 7.6% dividend as a lure, but that pales in comparison to the 34% loss the stock has posted so far this year. And there’s still at least as much downside to upside here.
— Louis Navellier
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Source: Investor Place