The oldest investment advice on Wall Street is buy low and sell high. But the problem is that you never know exactly where the lowest or highest prices are.
Regardless of the price, with real estate investment trusts (REITs) a cheap buy can often mean buying a stock for life with a very high dividend yield. Will that high dividend yield soon go away 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 fallen in price over the past four weeks and are now posting dividend yields much higher than their five-year averages. Are they yield traps or bargains? The following information can help you decide.
Uniti Group Inc. (NASDAQ: UNIT) is a specialty REIT based in Little Rock, Arkansas that acquires and builds mission-critical communications infrastructure in the form of fiber optic, copper and coaxial broadband networks.
Uniti Group currently owns and operates 129,000 miles of fiber route covering 270,000 commercial buildings, with the majority of its network located in the eastern and midwestern United States. Today it is one of the 10 largest fiber optic providers in the USA. Fiber optic leasing to anchor customers generates about 70% of total revenue.
Uniti Group pays a quarterly dividend of $0.15 and its annual dividend of $0.60 is now 16%. The five-year average dividend yield is 8.86%.
On March 10, President and CEO Kenny Gunderman purchased 225,000 shares of Uniti Group at an approximate price of $4.37. The total transaction was $983,250. Does it make sense that Gunderman would buy nearly $1 million worth of stock now if he thought there was a possibility of a looming dividend cut?
With an expected annual funds from operations (FFO) of $1.03 and an annual expected 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 as revenue missed analysts’ target but FFO came in ahead of expectations. The forward guidance for 2023 was also below the analysts’ expectations.
All of this could be reflected in the stock price at this point. Uniti Group’s total return over the past four weeks was -34.05%. With a current price of $3.71 and a price/FFO (P/FFO) of just $3.60, Uniti Group could be an excellent bargain 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 office lessor in New York City, with 33.1 million square feet in 61 buildings.
With a current 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 deep 15.46% short position, as investors bet the work-from-home movement will continue and office utilization will fall.
However, many companies are beginning to require their employees to return to the office, either full-time or part-time. And New York City subway ridership has increased, which may 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 gearing ratio of 128 is still fairly high, so there’s some risk that the board might decide to do it again.
But the FFO payout ratio is only 59.7%, so there’s little risk that SL Green will fail to meet its dividend obligations. The five-year average dividend yield is 5.39%, indicating a deeply undervalued share price. SL Green stock has posted a total return of minus 29.49% over the past four weeks.
Morgan Stanley recently maintained an equal weight position in SL Green while lowering its price target to $35 from $38. That gives SL Green a potential upside of 27.6%. Given its high dividend yield and potential upside, SL Green might be a steal right now, but it’s a long-term game.
Vornado Realty Trust (NYSE:VNO) is another major landlord of offices and retail properties in New York City. Like SL Green, Vornado Realty has a high short interest rate level of 8.95%.
The quarterly dividend is $0.375 and the annual dividend of $1.50 currently yields 9.4%. The 5-year average dividend is 5.43% and the FFO payout ratio is just 55.9%. But Vornado Realty also cut its dividend from $0.53 to $0.375 per share in January, down 29%. The cut reduced the company’s FFO payout ratio from 79%.
Vornado Realty’s fourth-quarter results were also mixed, with FFO at $0.72 beating estimates by $0.05, but revenue at $446.94 million, below Street’s estimate of $452.88 million .$ lay.
On March 3, BMO Capital downgraded Vornado Realty from Market Perform to Underperform and lowered its price target to $18 from $26. On March 9, Morgan Stanley maintained its underweight position in Vornado Realty while lowering its price target to $18 from $19. Analysts said Vornado Realty will expire many more leases in the next two years than competitor SL Green, and that the level of debt and spending will continue to affect the bottom line.
While the FFO payout ratio is at safe levels, the recent dividend cut and lease expiration warnings 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 has come in at -29.67%, so more adventurous investors might be tempted to make this an opposite buying option. But Vornado Realty still needs a few quarters to show its dividend is stable before more conservative investors can trust this REIT.
In the last five years, private real estate investments have outperformed the publicly traded REIT market by about 50%. Check out Benzinga Screener for real estate offers to discover the latest passive real estate investments.
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This article 3 Crushed REITs: Bargain or Yield Trap? originally appeared on Benzinga.com
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Source : finance.yahoo.com