In an environment where high interest rates continue for an extended period of time, there are some REITs that should be avoided. These investment vehicles are particularly sensitive to rising interest rates because they rely on debt financing. In this economic climate, REITs with high leverage ratios, short debt maturities, and limited cash flow may struggle to maintain profitability and dividends.
Additionally, certain sectors within the REIT universe are more vulnerable than others. For example, mortgage REITs (mREITs) that invest in mortgage-backed securities are directly affected by changes in interest rates.
REITs are great for income investors and can be a decent diversifier in a balanced portfolio, but overexposure to this sector can be particularly risky, especially for trust stocks with unstable fundamentals. The risks may be even greater when purchasing. All of this will be further amplified by the stock market crash.
Here are three REITs to avoid this May.
Digital Realty Trust (DLR)
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Digital Realty Trust (New York Stock Exchange:DLR) focuses on data centers and digital infrastructure. Concerns are arising from rising interest rates and potential oversupply in the data center market.
DLR experienced a 2% decline in revenue in the fourth quarter of 2023 compared to the third quarter. However, the net profit is
In 2023, it increased by 18.8%. The company reported fourth-quarter 2023 sales of $1.4 billion, with a projected 2024 sales range of between $5.55 billion and $5.65 billion.
Recent developments include a $7 billion joint venture agreement. black stone To seize further opportunities in the data center market.
DLR has several issues that make it unattractive. First, the dividend has not been increased since March 14, 2022. However, the stock price has increased by 45.64% over the past year.
But built into these capital appreciations is the assumption that aggressive growth will continue. The company’s P/E ratio of 46x proves this. REITs operate more like growth stocks than income-producing assets because they have little earnings growth and high stock prices.
Simon Property Group (SPG)
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Simon Property Group (New York Stock Exchange:Self-propelled artillery) specializes in retail real estate, including shopping malls and outlets. The decline of brick-and-mortar retail due to e-commerce competition and changes in consumer behavior poses significant risks.
The company reported fourth quarter 2023 FFO of $1.38 billion and expected 2024 FFO of $11.85 to $12.10 per share. The retail real estate portfolio demonstrated resilience despite the challenges posed by e-commerce and changes in consumer behavior. Fundamentals also skyrocketed, with funds from operations (FFO) hitting a record high of $4.7 billion.
Despite being favored by e-commerce giants; Amazon (NASDAQ:AMZN) There is no substitute for the in-person shopping experience as it has become a staple of our lives.
However, I am worried as it is. SPG is not a growth company, and when we looked at its EBITDA from 2016 to 2023, it averaged around $4.315 billion, reflecting its top line.
SPG’s stagnation reflects the retail sector’s stubborn resilience, which may make neither of them attractive from a growth perspective.
Office Real Estate Income Trust (OPI)
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Office real estate income trust (NASDAQ:OPI) focuses on office properties throughout the United States.
OPI reported a challenging 2023 performance, with revenue down 3.7% from 2022 to $533.55 million. The company’s stock price has fallen significantly throughout 2023, with a total return of -35.7%. In the fourth quarter of 2023, OPI reported a net loss of $37.2 million, and the dividend was also reduced.
For many investors, the dividend cut is enough to consider tossing OPI in the trash. Surprisingly, OPI’s stock price is down 71.91% since the beginning of the year, yet its dividend yield is only 2%. This is evidenced by its dividend growth rate of 96%.
With a market cap still at $97 million, some investors are holding out. The situation is likely to be worse than this. Therefore, OPI is a very risky play with little upside.
On the date of publication, Matthew Farley did not have (directly or indirectly) any positions in the securities mentioned in this article. Opinions expressed are those of the writer and are subject to InvestorPlace.com Publishing Guidelines..
