Since November, excitement about lower interest rates has boosted interest-rate-sensitive stocks like real estate investment trusts (or REITs). However, as rate cut enthusiasm cools, now may be the time to determine what REITs to sell.
Yes, it’s not as if lower interest rates in 2024 are no longer on the table. A recent statement from one Federal Reserve official (Atlanta Fed President Raphael Bostic) suggests that lower rates will begin to arrive later this year.
Rate cuts notwithstanding, chances are they will not solve a vital issue affecting office real estate since 2020: the move to remote and hybrid working environments for white-collar employees.
Although the real estate industry may be considered “one of the biggest societal problems we’re facing right now,” as Marc Holliday, CEO of office REIT SL Green Realty, put it in a recent 60 Minutes piece, this trend is not going away.
That’s not all. Other REIT types (healthcare, retail, specialty) face problems that lower interest rates cannot solve. Looking at names in the space that fit in either category, I have found the top seven REITs to sell.
CBL & Associates Properties (CBL)
CBL & Associates Properties (NYSE:CBL) is a retail REIT that owns 94 malls and shopping center properties across the United States. Hit hard by the pandemic and its impact on brick-and-mortar retail, CBL filed for bankruptcy in November 2020.
However, within a year, the REIT quickly reorganized, exiting Chapter 11 a year later. CBL stock has delivered a mixed performance post-bankruptcy but has been trending higher lately, largely due to the specter of lower interest rates.
Yet, while now may seem like an opportune time to buy CBL, outside of its moderately high yield (6.1%), it may not have much else going for it. As a Seeking Alpha commentator recently argued, CBL has limited upside potential and is contending with still-high debt and the lower-quality nature of its portfolio. With this, it may not take much to drive an unexpected massive move lower for shares.
Highwoods Properties (HIW)
High exposure to the societal trends affecting office demand is what makes Highwoods Properties (NYSE:HIW) one of the top REITs to sell. This REIT owns downtown office buildings in numerous cities across the U.S. “sun belt.”
Yet while Highwoods is focused on properties in areas of the country experiencing higher levels of population growth, the long-term headwinds the office building space faces may far outweigh it. At least, that’s the takeaway from credit rating agency S&P’s recent downgrade of Highwoods’ outlook from “stable” to “negative.”
S&P noted that Highwoods has an elevated lease expiration schedule, with leases covering nearly a quarter of its annualized rent expiring between now and 2025. Despite a high yield (9.2%), you may want to stay away from HIW stock, as further office demand challenges could cause it to cough back recent rate cut gains and then some.
Hudson Pacific Properties (HPP)
Last August, Hudson Pacific Properties (NYSE:HPP) was contending with the impact of the Hollywood union strikes on leasing the REIT’s sound stage and film/TV production facilities.
Since then, Hollywood’s labor issues have been resolved, and media production is back in full swing. This, plus the interest rate news, has resulted in HPP stock more than doubling off its low. Yet, while it may appear that the future is getting brighter for Hudson Pacific, issues with its office portfolio have not gone away.
Occupancy rates for its office portfolio were at 81.3% during Q3 2023 versus 85.2% during Q2 2023. Last quarter, the positive impact of asset sales helped to outweigh this, but that may not be the case if occupancy rates continue to drop in the quarters ahead for this struggling REIT, which suspended its common stock dividend last year.
Medical Properties Trust (MPW)
Medical Properties Trust (NYSE:MPW) is another name that other commentators and I have consistently labeled as one of the REITs to sell. Admittedly, the time to avoid this healthcare REIT before it crashed and burned was quite a while ago.
Over the past year, MPW stock has collapsed to the tune of 77.2%. Chalk it up to a variety of negative developments, including a major dividend cut last August. Even so, just because Medical Properties Trust has already crashed and burned doesn’t mean the dust has truly settled.
Subsequent developments, such as another possible dividend cut or further troubles with its main problem tenant (Steward Health Care System), could result in further sharp price declines. As shares are again sporting a very high yield (around 19.5%) due to the latest sell-off, the best move is to stay away from this longtime “falling knife” situation.
Orion Office REIT (ONL)
Spun off from Realty Income (NYSE:O) in late 2021, Orion Office REIT (NYSE:ONL) shares have tanked from $25 to around $5 per share in a little over two years. However, another “crash and burn” round for this REIT is very possible.
One important thing to note about ONL stock is that this office REIT focuses on single-tenant properties. This may place Orion in a precarious position if occupancy rates drop this year as a large portion of its leases (27.2%) come due. The REIT may end up stuck trying to sell or reposition entire vacant office buildings.
While Orion may appear cheap on paper, trading for less than a third of its book value at a price-to-funds from operations (P/FFO) ratio of only 3, and with a forward yield of 7.91%, there’s ample reason why investors have de-priced ONL to such a distressed valuation.
Office Properties Income Trust (OPI)
Office Properties Income Trust (NASDAQ:OPI) is another office REIT focused on single-tenant properties. OPI has had a rough start this year, with shares dropping 37.6% on Jan. 11 alone. This big decline came upon news of the REIT slashing its quarterly dividend from 25 cents to just a penny per share.
Although significantly reducing its payout to conserve cash was a prudent move, more trouble lay ahead for the REIT and for an occupancy rate of 93.3% may sound solid, but at the same time, it may prove fleeting.
Why? Per its latest investor presentation, leases covering nearly 40% of Office Properties Income Trust’s leases expire between now and 2026. While government agencies make up a large portion of their tenant base, remember that even the U.S. Federal Government is weighing whether to reduce its leasing footprint.
Paramount Group (PGRE)
Paramount Group (NYSE:PGRE) is an office REIT focused on downtown New York and San Francisco properties. Previously, I’ve talked about the big risks with Paramount Group, particularly the REIT’s tenant expiration issues.
PGRE stock has held steady for most of the past year, yet I wouldn’t assume it’s out of the woods and on its way to a recovery. Although hares briefly rallied on the interest rate news in November and December, occupancy-related concerns are coming off the back burner.
As discussed in Paramount Group’s latest investor presentation, many of its flagship properties continue to have large-block vacancies. Leases covering more than a third of its total square footage are set to expire between now and 2026. Barring the sudden emergence of more favorable office building demand trends, keep PGRE on your “REITs to sell” list.
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.