3 Crushed REITs: Are They Bargains Or Yield Traps?

The oldest investing advice on Wall Street is to buy low and sell high. But the problem is that you never know for sure where the lowest or highest prices are. 

Regardless of price, with real estate investment trusts (REITs), buying low can often mean purchasing a stock for life with a very high dividend yield. Will that high dividend yield soon disappear with a nasty dividend cut, or is it an opportunity to lock it in for the long term?

Take a look at three REITs that have been crushed in price over the past four weeks and now sport dividend yields much higher than their five-year averages. Are they yield traps or bargains? The following information may help you decide.

Uniti Group Inc. UNIT is a Little Rock, Arkansas-based specialty REIT that acquires and constructs mission-critical communications infrastructure in the form of fiber optics, copper and coaxial broadband networks.

Uniti Group currently owns and operates 129,000 fiber route miles covering 270,000 commercial buildings, with most of its network in the Eastern and Midwestern U.S. It’s one of the 10 largest fiber providers in the U.S. today. Its fiber optic leasing to anchor customers generates about 70% of its total revenue.

Uniti Group pays a $0.15 quarterly dividend and its $0.60 annual dividend now pays 16%. The five-year average dividend yield is 8.86%.

On March 10, President and CEO Kenny Gunderman bought 225,000 shares of Uniti Group stock at an approximate price of $4.37. The total transaction was $983,250. Does it seem logical that Gunderman would buy almost $1 million worth of stock now if he thought there was a possibility of a looming dividend cut?

With forward annual funds from operations (FFO) of $1.03 and the forward annual dividend rate of $0.60, Uniti Group’s FFO payout ratio is 61%, which usually means a dividend is fairly safe.

But Uniti Group is not without its risks. Its fourth-quarter results were mixed with revenue missing analysts’ target but FFO coming in above expectations. Forward guidance for 2023 was also below analysts’ expectations.

This may all be baked into the stock price 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 only $3.60, Uniti Group could be a tremendous bargain for investors with a long-term horizon. At present levels, an investor would be buying the stock at a 15% discount to what the CEO just paid.

 

SL Green Realty Corp. SLG is an office REIT and the largest landlord of New York City office space, with 33.1 million square feet in 61 buildings.

At a recent price of $27.41, SL Green shares are now below the COVID lows of 2020. One factor weighing on SL Green’s performance is its high short position of 15.46%, as investors bet that the work-from-home movement will continue and office occupancy levels will decline.

But many companies are starting to require workers to return to the office, either full or part time. And New York City subway ridership numbers have been moving higher, 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 presently yields 11.7%. SL Green cut its monthly dividend by 12.8% from $0.311 in December, and its debt-to-equity ratio of 128 is still quite high, so there is some risk that the board of directors could decide to do it 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 dividend yield average is 5.39%, implying a grossly undervalued stock price. SL Green stock has a total return over the past four weeks of negative 29.49%.

Morgan Stanley recently maintained an Equal Weight position on SL Green, while lowering its target price from $38 to $35. That gives SL Green a potential upside of 27.6%. Between the high dividend yield and the potential appreciation, SL Green could be a bargain right now, but it’s a long-term play.

 

Vornado Realty Trust VNO is another large New York City landlord of offices and retail properties. 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 presently yields 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 29% decline. The cut reduced its FFO payout ratio down from 79%.

Vornado Realty’s fourth-quarter results were also mixed, with FFO of $0.72 beating estimates by $0.05, but revenue of $446.94 million falling below Street estimates of $452.88 million.

On March 3, BMO Capital downgraded Vornado Realty from Market Perform to Underperform and lowered the price target from $26 to $18. On March 9, Morgan Stanley maintained its Underweight position on Vornado Realty, while lowering the price target from $19 to $18. Analysts said Vornado Realty will have many more lease expirations over the next two years than rival SL Green, and debt levels and expenses will continue to affect its bottom line.

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 a 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 may be tempted to make this a contrarian type of purchase. But Vornado Realty will need to prove 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 about 50%. Check out Benzinga’s Real Estate Offering Screener to discover the latest passive real estate investments.

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