We can all agree that the Federal Reserve’s never-ending battle in curbing inflation has been incredibly exhausting. The latest in this saga is that the Fed believes it will have to keep interest rates “higher for longer,” which will likely result in significant volatility in the stock market. With these economic pressures expected to sustain for a while, it might be time to think about REITS to sell.
Real Estate Investment Trusts (REITs) are known to be sensitive to interest rate fluctuations. Some trusts may be more affected than others, but the majority have seen their valuations dip amidst the heightened interest rates. Another major issue for REITs, especially those investing in office properties, is the seismic shift towards remote work during the pandemic. Moreover, that is far from a fleeting trend, as USA Today revealed that one in five Americans will be working remotely by next year.
Global Net Lease (GNL)
Global Net Lease (NYSE:GNL) is a formidable player in the commercial real estate realm, specializing in single-tenant industrial, office, and retail spaces across the U.S. and Europe. Though the REIT boasts a wide-ranging portfolio of income-producing properties under long-term leases, the post-pandemic remote working trend casts a major shadow of uncertainty. Layer that up with the heightened interest rates, and you have a bear case that’s more compelling than ever.
Most recently, GNI trimmed its dividend by more than 20%, setting it at 27.5 cents per share. It currently yields a lofty 14.8%, while its funds-from-operations (FFO) growth is at a negative 16%. Such numbers raise major red flags regarding the sustainability of its dividends.
Moreover, GNL is under major pressure to de-lever as its debt maturities approach. The firm’s distress is underscored by a concerning Altman Z score of -0.29, placing it firmly in the distress zone. This concerning liquidity position signals caution for investors, with the ability to navigate these troubled waters remains uncertain.
Orion Office REIT (ONL)
Orion Office REIT (NYSE:ONL), spun off from the stalwart Realty Income (NYSE:O) in 2021, specializes in single-tenant net lease office properties. In the past year, we’ve seen ONL stock take a massive hit over the past year, with the investing sentiment growing remarkably beak towards Orion’s future. Its management is trying its best to stabilize the business through sales of vacant properties, but it hasn’t made much progress in controlling vacancy rates.
The explosion in the work-from-home model has completely altered the landscape for office spaces. Consequently, Orion’s AFFO growth this year has been at a negative 28%, way behind the sector median of 2.2%. Additionally, it boasts an unsustainable dividend yield of 11.33%, with an interest coverage ratio of just 0.16, 92% behind the sector median. Hence, it’s not looking too bright for ONL’s investors, with its stock plummeting more than 80% since its inception.
Hudson Pacific Properties (HPP)
Hudson Pacific Properties (NYSE:HPP) is another REIT that’s buckling under economic headwinds. This is shown by its dwindling financial position, which is marked by declining sales and rising operational expenses. In the past three quarters, it has posted negative sales growth while missing analyst estimates by sizeable margins. In fact, in the past six quarters, it has beaten analyst estimates on just one occasion.
The core of its troubles lies in its office segment, where declining sales and sinking occupancy rates present ongoing challenges. Moreover, an imminent wave of lease expirations will likely weigh down the REIT’s prospects. If that wasn’t enough, you have the remote working trend that will continue overshadowing HPP’s office portfolio.
Additionally, the widely discussed Hollywood union strikes last year dealt a severe blow to its sound stages and production facilities, further exacerbating its challenges. This series of setbacks paints a bleak picture for the future of HPP stock.
On the date of publication, Muslim Farooque 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