Are they bargains or revenue traps?

March 18, 2023

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

Regardless of 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 that high dividend yield soon disappear with a nasty dividend cut, or is it an opportunity to lock it in for the long haul?

Look at three REITs that have crashed in price over the past four weeks and are now sporting dividends far 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 mission-critical communications infrastructure in the form of fiber, copper and coaxial broadband networks.

Uniti Group currently owns and operates 129,000 fiber route miles covering 270,000 commercial buildings, with the majority of its network in the Eastern and Midwestern United States. It is one of the 10 largest fiber providers in the US today. Fiber optic leasing to anchor customers generates approximately 70% of total revenue.

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

On March 10, President and CEO Kenny Gunderman purchased 225,000 shares of Uniti Group at a price of approximately $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 an annual forward fund from operations (FFO) of $1.03 and an annual dividend rate of $0.60, Uniti Group’s FFO payout ratio is 61%, which usually means a dividend is pretty safe.

But Uniti Group is not without risks. Fourth-quarter results were mixed, with revenue missing analysts’ target but FFO exceeding expectations. The forward guidance for 2023 was also below analysts’ expectations.

This could all be baked into the stock price right now. Uniti Group’s total return over the past four weeks is -34.05%. With a recent price of $3.71 and a price/FFO (P/FFO) of just $3.60, Uniti Group could be a great bargain for investors with a long-term horizon. At current levels, an investor would buy the stock at a 15% discount from what the CEO just paid.

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

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

But many companies are starting to require employees to return to the office, either full-time or part-time. And New York City subway passenger numbers are up, 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-to-equity ratio of 128 is still quite high, so there is some risk that the board decides to re-issue it. doing.

But the FFO payout ratio is only 59.7%, so there is little risk that SL Green will default on its dividend obligations. The average dividend yield over five years is 5.39%, implying a highly undervalued share price. SL Green stock has posted a total return of -29.49% over the past four weeks.

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 potential valuation, SL Green could be a bargain right now, but it’s a matter of patience.

Vornado Real Estate Trust (NYSE: VNO) is another major office and retail lessor in New York City. Like SL Green, Vornado Realty has a high short-term interest rate of 8.95%.

The quarterly dividend is $0.375 and the annual dividend of $1.50 currently 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% drop. The reduction caused the FFO payout ratio to drop from 79%.

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

On March 3, BMO Capital downgraded Vornado Realty from Market Perform to Underperform and cut its price target from $26 to $18. On March 9, Morgan Stanley maintained its underweight position in Vornado Realty and lowered its price target from $19 to $18. Analysts said Vornado Realty will have far more leases than rival SL Green over the next two years, and debt and costs will continue to affect the company’s bottom line.

While the FFO payout ratio is at a safe level, the recent dividend cut and lease expiration warnings have put this office REIT at greater risk of becoming a yield trap than a bargain. Vornado Realty’s total return over the past four weeks is -29.67%, so more adventurous investors may be tempted to make this a contrarian purchase. But Vornado Realty will have to prove that the 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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