Real estate has not remained immune to the ongoing harsh economic conditions, as home sales plummeted as much as 31% sequentially in Sept 2022. Mortgage rates are through the roof from multiple benchmark interest rate hikes so far this year and consumer sentiment (measured by the Fannie Mae Home Purchase Sentiment Index) declined for eight consecutive months in October. Currently, only 16% of consumers believe that now is the right time to buy a house.
Commercial real estate is also having a hard time, as borrowing costs escalate. The situation might worsen further, as the Federal Reserve Chairman Jerome Powell stated that the talks of any pause in rate hikes are “premature,” insinuating further rise in mortgage costs down the line. Moreover, the changing lifestyle landscape in the post-pandemic era has reduced the demand for commercial properties leased as office workspaces.
The Dow Jones U.S. Select REIT Index is down 25.05% year-to-date, while the comparable equity index is down only 7.73%. Thus, it is safe to say that some real estate investment trusts (REITs) might not be the most prudent investment option right now. Let’s look at the highly speculative REITs that you, perhaps, will want to avoid this month.
EPR Properties EPR
This Missouri-based company is one of the largest owners and operators of theater properties across the United States and Canada, with more than $2 billion in total investments. With a 7.99% dividend yield, EPR Properties is certainly grabbing attention from investors right now.
But don’t be fooled by the high dividend yield percentage. The REIT’s dividend payouts have actually declined at a 10.54% compound annual growth rate (CAGR) over the past three years. More interestingly, its largest tenant, the U.K.-based movie theater operator Cineworld Group’s parent company Regal Entertainment Group recently announced bankruptcy. Regal Entertainment leases 57 theaters from EPR Properties.
This circumstance will have some harsh ramifications for EPR Properties, as Regal Entertainment Group’s rental payments account for 13.5% of the former’s total revenues (for the quarter ended June 2022). Following the filing of the Chapter 11 bankruptcy, Regal Entertainment did not pay deferred rents for September 2022. While it resumed payments in October, EPR Properties stated in its latest quarterly reports that “there can be no assurance that subsequent payments will be made in a timely and complete manner.”
Furthermore, as the popularity of over-the-top platforms such as Netflix and Amazon Prime skyrockets, theater-going trends have taken a back seat. This shift poses a much bigger threat to EPR properties over the long term.
ARMOUR Residential REIT Inc. ARR
With shares down nearly 40% year-to-date, ARMOUR Residential is definitely feeling the brunt of the rapidly cooling housing market. The REIT’s financials have deteriorated significantly as a result. Its book value fell 19.59% quarter-over-quarter to $5.83 for the fiscal third quarter ended Sept 30. The total comprehensive loss amounted to $152.7 million, or $1.26 at the end of the quarter, compared to a $93.2 million (or $0.90 per share) comprehensive loss reported in the prior quarter (ended June 2022). Its net interest income fell nearly $10 million sequentially as well.
ARMOUR Residential pays $1.20 as dividends annually, yielding an impressive 20.24% on the current share price. It is easy to be tempted by the double-digit percentage but don’t fall into a yield trap. The company’s dividend payouts actually fell at an 18.29% CAGR over the past three years and at a 19.04% CAGR over the past 10 years.
ARMOUR Residential actually reduced its annual dividend payments in 2020, despite the booming real estate markets during the COVID era. Analysts expect the company to reduce its annual dividend amount by two cents next year.
Claros Mortgage Trust Inc. CMTG
Headquartered in New York, Claros Mortgage Trust originates and manages loans on commercial real estate properties across the U.S. As the real estate space cools at a rapid pace amid record-high mortgage rates, the demand for senior and subordinate loans has reduced substantially in recent months.
Though the REIT raised roughly $878 million in new loans, its earnings plummeted sharply quarter-over-quarter over the three months that ended Sept. 30, 2022. Net income came in at $42.07 million, reflecting a 33% decline from the fiscal second quarter. Distributable earnings per share (EPS) fell by 10 cents, or 23.25% sequentially in the last quarter.
JP Morgan analyst Richard Shane recently issued a bearish underweight rating for the stock. He has a price target of $16.50 for CMTG stock, indicating an 8.54% potential downside from the current price.
Despite being established back in 2015, Claros Mortgage Trust only recently began distributing dividends. It pays $1.11 in dividends annually, yielding 6.25%. As the company’s profit margins decline, it’s doubtful that the REIT will be able to maintain its current payout structure.
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