Real estate stocks are forming the perfect storm.
First, the pandemic greatly reduced society’s desire to use various kinds of commercial real estate. Second, soaring interest rates have made it far more difficult for leveraged real estate owners to make good on their interest payments and debt refinances.
Some firms will get through the disruption just fine. Others, however, will not. Now is the moment to sell real estate stocks that are vulnerable to the current downturn. Smart investors will heed this sell alert for three particular real estate stocks that simply aren’t going to thrive in current economic conditions.
Medical Properties Trust (MPW)
The company has long been embroiled in controversy. Two of its largest tenants, Steward Health Care and Prospect Medical Holdings, are in financial trouble. As those two companies make up more than a third of Medical Properties Trust’s overall revenues, that puts the REIT’s outlook on a shaky footing.
Medical Properties Trust has turned into a battleground stock. Multiple short sellers and research firms have taken aim at the company. These analysts allege untoward insider dealings and questionable financial disclosures, among other matters. Income investors have held onto the stock for its high dividend.
However, with Medical Properties’ mixed financial results along with the general pressure caused by higher interest rates, this seems like a far-too-risky pick for the average real estate investor. Currently, MPW stock has more than 20% short interest, indicating that the bears have high conviction that this REIT is in poor health. With the stock’s recent rebound, now is a great time to sell at this more favorable exit point.
Simon Property Group (SPG)
Simon Property Group (NYSE:SPG) is a REIT focused primarily on malls and outlet centers.
Malls have been attempting to bounce back after the COVID-19 related disruption to the industry. However, it’s been a rough road. While the economy has reopened, e-commerce continues to inexorably take its toll on shopping malls.
Simon has focused on higher-end malls, which has blunted the impact of the industry’s decay to a degree. Yet so many department stores and other traditional tenants go bust and shutter their operations entirely. That trend continues, with a recent Wall Street Journal article discussing how local malls are stuck in a “death spiral“.
Simon is trying to make the most of a tough situation. But investors seem far too generous with the firm’s valuation. Especially in a world with higher interest rates and a potential recession on the horizon, shopping malls are unlikely to be an attractive asset class anytime soon.
City Office REIT (CIO)
City Office REIT (NYSE:CIO) is a smaller REIT focused on sunbelt American markets.
The REIT is not especially well-diversified. Its top three markets make up 57% of its estimated total gross asset value. These three markets are Phoenix, Tampa, and Raleigh, North Carolina, respectively. These are somewhat smaller markets than the average office REIT which often focus on large cities like New York, Boston, or San Francisco.
This leaves City Office in a relatively vulnerable position. It has a significant number of near-term expiring leases. Meanwhile, demand for office space can be more volatile in some of these regional markets. The industry as a whole is struggling to deal with the shift to remote work. City Office’s properties may not be well-positioned for that reality.
The company recently cut its dividend in half, noting that the reduction would free up $16 million per year in additional liquidity. That might not be enough, however, given the large amount of capital that may be required to reposition aging office properties. In addition, City Office isn’t generating profits on an earnings basis anymore. It lost $1.2 million last quarter. This casts further doubt around the security of the remaining dividend payout.
On the date of publication, Ian Bezek did not have (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.