There are some REITs to avoid in this continued “higher for longer” interest rate environment. These investment vehicles are particularly sensitive to rising interest rates due to their reliance on debt financing. In this economic climate, REITs with high leverage ratios, short-term debt maturities and limited cash flows may struggle to maintain profitability and dividend payouts.
Moreover, certain sectors within the REIT universe are more vulnerable than others. For instance, mortgage REITs (mREITs), which invest in mortgage-backed securities, are directly impacted by interest rate fluctuations.
Although REITs can be great for income investors and a moderate diversifier in a balanced portfolio, overexposed to this sector can be especially risky, amplified when buying shares of trusts with shaky fundamentals. All of this would be amplified in a stock market crash.
So here are three REITs to avoid in May this year.
Digital Realty Trust (DLR)
Digital Realty Trust (NYSE:DLR) focuses on data centers and digital infrastructure. Concerns arise from rising interest rates and potential oversupply in the data center market.
DLR saw a revenue decrease of 2% in Q4 2023 compared to Q3. However, its net income for
2023 increased by 18.8%. The company reported revenues of $1.4 billion for Q4 2023, with a projected revenue range in 2024 between $5.55 billion and $5.65 billion.
Recent developments include a $7 billion joint venture deal with Blackstone to capture further opportunities in the data center market.
Some issues with DLR make it unappealing. First, its dividend hasn’t been raised since March 14, 2022. However, its stock price has grown by 45.64% over the past year.
But all this capital appreciation also comes with an inbuilt assumption that it will continue growing aggressively. Its P/E of 46 times earnings evidences this. With a REIT offering little income appreciation and expensive shares, it operates more like a growth stock than an income-generating asset.
Simon Property Group (SPG)
Simon Property Group (NYSE:SPG) specializes in retail real estate, including shopping malls and outlets. The decline of brick-and-mortar retail due to e-commerce competition and consumer behavior changes poses a significant risk.
For Q4 2023, the company reported an FFO of $1.38 billion and a projected FFO of $11.85 to $12.10 per share for 2024. The retail real estate portfolio showed resilience despite challenges posed by e-commerce and changing consumer behavior. Its fundamentals also soared, with record funds from operations (FFO) reaching $4.7 billion.
Despite e-commerce giants like Amazon (NASDAQ:AMZN) becoming a staple of our lives, nothing can quite replace the experience of in-person shopping.
However, I am concerned that this will remain the status quo. SPG isn’t a growing company, and when examining its EBITDA from 2016 to 2023, it oscillated around the average of $4,315 million, mirroring its top-line.
SPG’s stagnation reflects the stubborn resilience of retail, and both may be unappealing from a growth aspect.
Office Properties Income Trust (OPI)
Office Properties Income Trust (NASDAQ:OPI) focuses on office properties across the United States.
OPI reported a challenging 2023 performance, with revenues declining by 3.7% to $533.55 million compared to 2022. The company saw a significant drop in its stock price throughout 2023, leading to a total return of negative 35.7%. In Q4 2023, OPI reported a net loss of $37.2 million and saw a dividend reduction.
A dividend cut is enough for many investors to consider throwing OPI in the bin. Amazingly, OPI only pays a 2% dividend yield despite its stock price falling 71.91% year-to-date. This can be chalked up to its dividend growth rate cratering to 96%.
Some investors are holding on, with its market cap still at $97 million. There’s a high likelihood that things will get worse than this. OPI is therefore a very high risk play with little perceivable upside.
On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.