Wall Street’s oldest investment advice is to buy low and sell high. But the problem is that you never know for sure where the lowest or highest prices are.
Whatever the price, with real estate investment trusts (REITs), buying low can often mean buying a stock for life with a very high dividend yield. Will this high dividend yield soon disappear with a nasty dividend cut, or is this an opportunity to lock it in for the long haul?
Take a look at three REITs that have crashed in price over the past four weeks and are now boasting dividend yields well above their five-year averages. Are they yield traps or bargains? The following information can help you decide.
Uniti Group Inc. (NASDAQ: UNIT) is a Little Rock, Arkansas-based specialty REIT that acquires and builds critical communications infrastructure in the form of high-speed fiber optic, copper and coaxial networks.
Uniti Group currently owns and operates 129,000 miles of fiber route spanning 270,000 commercial buildings, with most of its network in the Eastern and Midwestern United States. It is one of the top 10 fiber suppliers in the United States today. Its optical fiber leasing to anchor customers generates approximately 70% of its total revenue.
Uniti Group pays a quarterly dividend of $0.15 and its annual dividend of $0.60 now pays 16%. The five-year average dividend yield is 8.86%.
On March 10, Chairman and Chief Executive Kenny Gunderman purchased 225,000 Uniti Group shares at an approximate price of $4.37. The total transaction was $983,250. Does it make sense that Gunderman would now buy nearly $1 million worth of stock if he thought there was a possibility of an imminent dividend cut?
With a projected annual funds from operations (FFO) of $1.03 and a projected annual dividend rate of $0.60, Uniti Group’s FFO payout ratio is 61%, which generally means that a dividend is quite safe.
But Uniti Group is not without its risks. Its fourth-quarter results were mixed, with revenue missing analysts’ target but FFO beating expectations. Forecasts for 2023 also fell short of analysts’ expectations.
All of this can be built into the course of action at this point. Uniti Group’s total return over the past four weeks is negative 34.05%. With a recent price of $3.71 and a price/FFO (P/FFO) of just $3.60, Uniti Group could be a huge boon for long-term investors. At current levels, an investor would buy the stock at a 15% discount to what the CEO just paid.
SL Green Realty Corp. (NYSE: SLG) is an office REIT and the largest owner of office space in New York City, with 33.1 million square feet in 61 buildings.
At a recent price of $27.41, shares of SL Green are now below 2020 COVID lows. A factor weighing on SL Green’s performance is its high short position of 15.46%, as investors bet the work-from-home movement will continue and office occupancy levels will drop.
But many companies are starting to require workers to return to the office, either full-time or part-time. And New York City’s subway ridership has increased, which could indicate more workers are returning to offices.
SL Green pays a monthly dividend of $0.271 per share. The annual dividend of $3.25 currently yields 11.7%. SL Green cut its monthly dividend by 12.8% from $0.311 in December, and its debt ratio of 128 is still quite high, so there is a risk that the board will decide to start again.
But the FFO payout ratio is only 59.7%, so there is little risk that SL Green will not meet its dividend obligations. The five-year average dividend yield is 5.39%, implying a grossly undervalued share price. SL Green stock has a total return over the past four weeks of minus 29.49%.
Morgan Stanley recently maintained an equal weight position in SL Green, while lowering its target price from $38 to $35. This gives SL Green an upside potential of 27.6%. Between the high dividend yield and potential appreciation, SL Green could be a bargain right now, but that’s a long-term game.
Vornado Real Estate Trust (NYSE: VNO) is another major office and retail owner in New York. Like SL Green, Vornado Realty has a high short interest level of 8.95%.
The quarterly dividend is $0.375 and the annual dividend of $1.50 currently pays 9.4%. The five-year average dividend is 5.43% and the FFO payout ratio is only 55.9%. But Vornado Realty also cut its dividend in January, from $0.53 to $0.375 per share, a drop of 29%. The cut reduced its FFO payout ratio by 79%.
Vornado Realty’s fourth quarter results were also mixed, with FFO of $0.72 beating estimates of $0.05, but revenue of $446.94 million falling below Street’s estimate of 452, $88 million.
On March 3, BMO Capital downgraded Vornado Realty from Market Perform to Underperform and lowered the target price from $26 to $18. On March 9, Morgan Stanley maintained its underweight position in Vornado Realty, while lowering the price target from $19 to $18. Analysts said Vornado Realty will have significantly more lease expirations over the next two years than rival SL Green, and debt levels and expenses will continue to affect its results.
While the FFO payout ratio is at a safe level, the recent dividend cut and warnings about its lease expirations put this office REIT at higher risk of being a yield trap than a bargain . Vornado Realty’s total return over the past four weeks is negative 29.67%, so more adventurous investors might be tempted to make this a type of contrarian buying. But Vornado Realty will have to prove that its dividend is stable for a few more quarters before more conservative investors can have confidence in this REIT.
Over the past five years, private market real estate investments have outperformed the publicly traded REIT market by approximately 50%. Check out Benzinga’s real estate deal finder for the latest passive real estate investments.
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This article 3 REITs Crushed: Are They Bargains or Yield Traps? originally appeared on Benzinga.com
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