VNORP - 3 REITs To Sell In 2024

2024-01-02 08:25:00 ET

Summary

• Opportunities remain abundant in the REIT sector.
• But not all REITs are worth buying after the recent rally.
• We highlight three REITs that we would consider selling.

REITs ( VNQ ) have rallied in recent weeks and now could be a good time to sell some of them.

I am still bullish on most REITs, but not all of them.

The REIT world is vast and versatile and there are lots of them that I expect to disappoint investors over the long run.

Here are three REITs that I would consider selling as we go into 2024:

Empire State Realty Trust ( ESRT )

ESRT is the owner of the Empire State Building in New York City and this trophy asset has attracted many investors to buy shares of ESRT.

As a result, it is today priced at a higher valuation multiple than its close peers SL Green ( SLG ) and Vornado Realty Trust ( VNO ).

But I think that it should be the opposite.

The Empire State Building is a great asset, but ESRT is much more than that. It also owns a portfolio of office buildings, many of which are older class B properties. On average, its assets are quite a bit older and less desirable than those of SLG and VNO and yet, it is now priced at a premium valuation.

The Empire State Building also has an observatory deck, which generates significant revenue for ESRT, but competition is also growing in this space with new observatories opening up at other buildings.

In short, I think that ESRT should be priced at a discount relative to SLG, but it is priced at a premium. For this reason, I would sell ESRT. Its older properties will require far greater capex investments in the coming years and this will likely weigh down on its results.

Orchid Island Capital ( ORC )

ORC is very popular among individual investors because of one primary reason: it offers a 17% dividend yield.

But even then, I would not be interested in owning it for the long run.

I believe that its business model is uninvestable because it is too heavily reliant on unpredictable macro factors such as interest rates and spreads, which are out of its control. It is also highly leveraged and its management has one of the worst track records in the entire REIT sector:

So yes, you are getting a high yield, but what's the point if it comes with significant capital losses over the long run?

To be fair, it is not just ORC.

The entire mREIT sector has done very poorly over the long run because their businesses are at the mercy of macro factors that are unpredictable. They have earned just 2% per year on average over the past 20 years:

There are better opportunities in other sectors of the REIT market.

A high yield does not equate to high returns.

Welltower ( WELL )

Welltower is a high-quality REIT, but the issue is that this is more than priced in.

It is one of just a few REITs that's now priced at near its all-time highs:

It owns a lot of senior housing communities and they are today enjoying rapid growth prospects.

But this expected growth is already priced into the stock.

The stock is valued at 25x FFO and its dividend yield is just 2.7%, a historic low for the company, which is especially odd considering that we are now in a much higher interest rate environment.

I would that quite a few of its healthcare peers are priced at much lower valuations.

To give you a few examples:

• Healthcare Realty ( HR ) is the leader in medical office buildings and it is priced at just 11x FFO.
• National Health Investors ( NHI ) is a pure-play senior housing REIT and it is priced at 13x FFO.

If I wanted to invest in this space, I would much rather own a combination of these two REITs instead of Welltower.

Closing Note

Not all REITs are worth buying.

Overall, REITs remain discounted and will likely do well in 2024 as interest rates return to lower levels.

But being selective will be key to minimizing risks and maximizing returns.

For further details see: