On December 13, a major change in investor sentiment towards real estate investment trusts (REIT) came as the Federal Reserve announced another pause in interest rate hikes and suggested there would be three rate cuts in 2024.
The REIT sector, which has performed well since early November, took off for several days, before falling back after December 14th.
Many low-cost REITs that lagged during the first 10 months of 2023 are now seeing a resurgence in buying. It appears that investors are buying REITs with ultra-high dividends, believing that a lower interest rate environment will solve the problems faced by these REITs, generating appreciation as well as a high dividend yield over the course of the year. ‘next year.
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Take a look at three low-cost REITs that could benefit from falling interest rates, while still paying dividends with high yields.
Office Building Income Trust (NASDAQ:OPI) is a Newton, Massachusetts-based office REIT with 154 properties covering 20.7 million square feet. In the third quarter, its occupancy rate was 89.9%. Office Properties is managed externally by the RMR Group inc. (NASDAQ:CMA).
In September, after strong shareholder opposition, Office Properties Income Trust agreed to terminate its proposed April merger with the RMR Group-managed company. Diversified healthcare trust (NASDAQ:DHC). Since then, this announcement has had a beneficial effect on Office Properties’ share price.
On November 17, Office Properties announced that Christopher Bilotto would take over as president and CEO of Diversified healthcare trust January 1st. Yael Duffy will be named President and Chief Operating Officer of Office Properties, also beginning in the new year.
On December 12, the day before the Federal Reserve’s announcement, office real estate closed at $5.91. Its most recent close was $6.88, a gain of 16.4%. Over the past month, it has gained 37.32%.
Its current dividend yield is 14.53%, but that’s down from over 23% a few weeks ago. The payout ratio is 23.8%, but with debt of $2.57 billion and operating cash flow of $109 million, a dividend reduction is possible in the future. As recently as April, Office Properties cut its quarterly dividend from $0.55 to $0.25 per share. Its last quarterly dividend of $0.25 was announced in October and paid on November 16.
Approving service properties (NASDAQ:CVS) is a diversified REIT based in Newton, Massachusetts, with a portfolio of 221 hotels and 761 service-oriented net lease locations that span 46 states, Puerto Rico and Canada. Service Properties owns numerous travel centers located along major U.S. highways. Service Properties is also managed externally by the RMR group.
On November 6, Service Properties Trust announced its third quarter operating results. Funds from operations (FFO) of $0.56 per share beat estimates of $0.54 as well as its FFO of $0.54 in the third quarter of 2022. Revenue of $496.82 million was exceeded the estimate of $489.19 million, but represents a slight decline from Q3 2022 revenue of $498.25 million.
Wall Street was not impressed. One problem is that Service Properties has $5.72 billion in high-interest debt, with a debt ratio of 83%, twice the average of its hotel REIT peers and 2, 5 times higher than the average net lease REIT.
On November 13, Wells Fargo Securities analyst Dori Kesten maintained an underweight on utility properties and lowered the price target from $8 to $6.50.
However, the Fed’s announcement this month was a boon for Service Properties, as it may be able to refinance much of its debt at lower rates next year. Before the announcement, it closed at $7.90 but climbed as high as $8.60 in three days before returning to $8.33. Shares are up 21.7% since the Nov. 13 low of $6.84.
Service Properties Trust has a current yield of 9.6% and a modest forward payout ratio of 46.5%. Despite the low payout ratio, the dividend could at some point be reduced unless Service Properties manages to refinance its $1.1 billion debt which matures in 2024.
Medical Properties Trust Inc. (NYSE:MPW) is a Birmingham, Alabama-based healthcare REIT that owns and operates 441 general acute care facilities and other properties in the United States and nine other countries, with locations in Europe and even Australia. General acute care hospitals represent 63.7% of its portfolio, valued at $19 billion. About two-thirds of its properties are located in the United States
Few REITs have suffered as much from adverse publicity and shaky finances as Medical Properties Trust in 2022. But it’s been on fire lately. Its recent close at $4.85 is 22.4% above the November 13 low of $3.96, and it reached a December 14 high of $5.76 before pulling back.
On November 29, JP Morgan analyst Michael Lapides maintained an underweight position on Medical Properties Trust and reduced the price target by 37.5%, from $8 to $5.
Like the REITs mentioned above, Medical Properties Trust will need to refinance its heavy debt load. Its yield of 12.37% seems quite safe, since the forward distribution rate is only 38.21%. Lower interest rates will help this REIT in 2024.
Keep in mind that the short interest on Medical Properties Trust is high at 23%.
All three REITs are quite volatile and may not be suitable for the most conservative investors.
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This item 3 Low-Price REITs With Higher Yields That Are Experiencing a Buying Renewal originally appeared on Benzinga.com
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