So REITs had a bad 2022. Are there bargains in the REIT sector? A few or many?
I am beginning to look at a couple of beaten down REITs, MAA & MPW.
MAA is down 31.5% over one year, from a pretty lofty starting price. MPW is down 52.1% over a year.
MPW’s revenues have been up each year over the last four years rising from $705 million in 2017to $1.545 Billion in 2021. Over that its share count has increased from 364 million shares in 2017 to 599 million today. Revenues was down in 3Q2022, but its revenues are up 1-2% ttm. MPW has a large amount of properties in Europe. This adds complexity to any analysis, but perhaps opportunities as well. The 3Q22 revenue drop appears at least partially the result of selling some properties and currency translation losses due to a strong USD, which has weakened a little recently. They also has a contract to sell some properties in early 2023. The proceeds are being used to reduce debt, but I suspect may weaken dividend coverage as well, although contract rent increases may help with the dividend somewhat. With the foreign properties and property sales, this is a complex one for me to evaluate.
MAA - I have owned MAA in the past, but its been just over a decade since I owned it. Its revenues have been steadily rising while maintaining a pretty flat asset base, debt levels and share count. Will rent increases continue? Will current rent levels hold? I believe those are the most important questions.
A long time ago I used to have a few REITS but I’ve been out of that game for too long to know anything useful. For the moment I put it into the “too hard” pile, especially considering the fundamental changes going on in real estate and society right now.
Works From Home is upending a lot of landlords, a possible recession may impact real estate more severely than other sectors, and… well… too hard.
I own MPW, too, and consider it to be one of my riskier REITs primarily because their largest hospital operation tenant, Steward Health Care, has been in financial distress. But that may be a thing of the past with Steward’s completion of a credit extension with its creditors. Still, MPW has a heavy short interest which is unusual for a REIT. But there is no indication that the dividend is in jeopardy and the dividend-to-FFO ratio is at 54%. Here is a recent Motley Fool article making the bull case for MPW:
I don’t know anything about MAA. I own no apartment REITs for no apparent reason other than they have been pricey until 2022.
I’ll post separately on my other REIT holdings many of which I have owned since, or shortly after, the Great Financial Crisis of 2008 - 2009, so my cost basis is quite low on those.
SLG is another of my riskier REITs that holds Class A office buildings in Manhattan. It is dirt cheap and it just reduced its dividend. But, it trades far below management’s NAV estimate of $99.00, and below Morningstar’s fair value estimate of around $59.00.
The reduced annual dividend of $3.25 is paid monthly and yields 9.6% based on Friday’s stock closing price. Management reduced the dividend in order to free up more cash flow to pay down debt to reduce the financial impact of higher interest rates, which I consider to be a prudent, if disappointing, move on their part. The dividend is well covered by FFO/AFFO.
There is a lot of negative sentiment in the market towards office REITs especially those in NYC. But SLG’s leasing operations have remained robust. I’m optimistic based on what I have read and heard from management’s earnings reports and conference calls.
Here’s a good value triple net REIT for you to consider: WPC.
At Friday’s closing price the dividend yield is 5.4%. The payout ratio to FFO is about 80% but the diversified nature of its business along with its near Dividend Aristocrat status is reassuring. It’s track record is marvelous–it has increased its dividend for 24 consecutive years–every year since it went public 24 years ago–even during the Great Financial Crisis and the the Covid bear market of 2020 and the 2022 bear market.
It owns almost 1400 commercial properties with about 30% of those are in Europe. 50% of the properties are industrial, warehouse and self-storage, 20% are office, 16% are retail and 9% are spread among education facilities, hotels, lab space and even funeral homes. About 80% of its acquisition volume in 2022 has been allocated to the industrial space. The office space is mostly leased to government tenants.
No single tenant accounts for more than 3% of the rent roll. The average lease term is about 11 years.
About 60% of its leases have rent escalations tied to the CPI so inflation is WPC’s friend. ;->
But what I really like about its long-term management profile is how WPC has successfully navigated the bear markets since it went public in 1998. Not only have they never missed a dividend payment but they have increased it every single year since 1998. No small feat.
I own a lot of shares in my retirement account with a cost basis of $75.03 and a dividend yield on cost at 5.6%.
I bought some MAA & MPW. Sold half of the MAA at a nice 10-15% gain and have since lost 90% of the previous gain. Just bought the MPW and I am down 2-3% in a few days.
I am not sure about offices or SLG. It has been a while since I owned any apartments and the last time that I did the industry was in much better shape.
I have own OHI and similar REITs (when there used to be more of them) and I understand the business metrics better. Just not sure how to measure any recovering in offices.
A couple that I have been looking at are BDN and LXP. BDN hit a multi-year low this morning. It operates in 3 markets Philly, DC & Austin with over 70% in Philly. It has a variety of property types, but that includes a lot of offices. Bankruptcy seems unlikely, but a dividend cut seems quite possible. Might buy after any dividend cut.
LXP used to have lots of offices, but has transitioned to industrial. Still doing research on it.
Also looking at OHI, but would like either a cheaper price or some recovery in the nursing home industry.
@Valuemongeragain–I agree with you about it being a buyer’s market. REITs have been in a downward spiral for all of 2022. And there is a lot of skepticism about REITs so far in 2023 especially for office REITs.
That said, I find that sentiment to be motivating to buy into REITs that have excellent, time-tested managements.
I recently invested in shares in another class A office REIT that is focused primarily, but not exclusively, on the West coast–KRC. Their debt ratio is low, almost extremely low for a REIT, and their dividend to FFO ratio is around 50%, which is also really low for a REIT. Check them out.
KRC does have a stellar balance sheet and dividend coverage. They are predicting a 3-5% decline in occupancy, but that is expected during recessions - assuming we have one which we probably will.
With a more than 50% share price decline, some future operating issues are priced in.
Their supplemental income statement for 4Q2022 lists their top 15 tenants. First time looking at an office REIT to this extent, the shopping center REITs always listed at a minimum their top 25 tenants with their credit ratings. Sorry that such detail was not included in KRC’s supplemental, but so far everything is looking pretty good
Bought 2,000 shares of BDN. So far all of my recent REIT purchases are slightly underwater, negative 0-2%. Done better in banks where I am up 7% to 143%. Just a little more risk with the banks though!!!
Almost all of my recent REIT purchases (within the last 12 to 18 months) are underwater but that doesn’t bother me (too much). It’s to be expected when investing in REITs on sale during any financial downturn. All of my investments during and shortly after the great recession back in 2008 were difficult but all have remained in positive territory by a lot. I expect the same results with my recent new REIT investments: ABR, ARE, EPR, GOOD, KRC, and MPW. MPW bothers me the most because the dividend yield is so high suggesting that Mr. Market is expecting a dividend reduction, and the shorts are weighing heavily on it.
Hi David,
I was talking to a guy on Seekingalpha who worked for a company that had a lot of hospitals. He seemed to know what he was talking about and he said they were looking to fill over 1000 nursing positions and they could not fill 100 beds because of that. I do not know but 1000 nurses seems like quite alot.
The conversation came up while we were discussing BXP and all the problems they might have getting people back to the offices.