VNO - Sell Alert: 3 REITs That Likely Will Cut Their Dividends

Summary

• Quite a few REITs are expected to cut their dividend in 2023.
• Rising interest rates and deteriorating economic conditions are putting pressure on some REITs.
• I highlight 3 REITs that are likely to cut their dividend.

Today, most real estate investment trusts ("REITs") are doing just fine.

Balance sheets are the strongest they have ever been...

And cash flows are hitting all-time highs after REITs took advantage of the high inflation to hike their rents:

This fueled a lot of dividend increases in 2022, and quite a few have already hiked their dividend in 2023. Just to give you a few examples:

• Realty Income ( O ) just announced a 2.4% dividend hike...
• Camden Property Trust ( CPT ) hiked it by 6.4%...
• And AvalonBay ( AVB ) hiked it by 3.8%...

...but not all REITs are created equal.

There are some good, some average, and some bad REITs, and while they are a minority today, there are some that face significant issues because they are either overleveraged, poorly managed, and/or own troubled assets.

Therefore, we expect a minority of REITs to cut their dividend in 2023 as they feel the growing pressure from rising interest rates and deteriorating economic prospects. Your number #1 priority should be to avoid these dividend cutters because cuts are typically followed by crashing share prices.

Here are three REITs that are likely to cut their dividend in the near term:

Brandywine Realty Trust ( BDN )

BDN just recently reaffirmed its dividend, and this has left many investors thinking that its near-12% dividend yield is sustainable.

There are also some other things to like about the company:

• About 20% of its NOI comes from Austin, Texas
• It owns a growing portfolio of life science buildings.
• It has a large pipeline of development opportunities.

But here's the issue:

The vast majority of BDN's assets remain office buildings, mainly located in Philadelphia. Its occupancy rate has been declining, and it could face growing pressure on rents in the coming years, especially if we go into a recession.

Moreover, the company has a fair bit of leverage, with a Debt-to-EBITDA ratio of around 7x, and its payout ratio is too high for an office REIT:

Offices are high capex properties, and BDN will almost certainly have to heavily reinvest in its properties and provide expensive tenant improvements to secure new leases and stabilize its occupancy rates.

Besides, it is now having a harder time accessing capital, since interest rates are up and its shares trade at a large discount to its net asset value. Last year, BDN sold some assets to recycle capital into development projects, but such transactions are also dilutive to funds from operations ("FFO") per share in the near term, putting further pressure on the dividend.

A few other office REITs that are in a similar situation have already cut their dividend, and I expect BDN to follow the same path. Douglas Emmett, Inc. ( DEI ) might be the most similar of its peers, and it cut its dividend by 32%.

I would wait for BDN to cut its dividend before considering initiating a position.

Modiv Inc. ( MDV )

MDV is one of the most recent IPOs in the REIT sector ( VNQ ).

It came public last year, and it is already very popular for its 11% monthly dividend yield.

I hate to kill the party, but I fear that a dividend cut is likely here.

Their dividend payout ratio is at nearly 90% today.

They are able to get by because they own mainly triple net lease properties with little need for capex, and their debt maturities are limited in the coming years.

But the high payout ratio leaves no room for error ,and MDV currently is in the process of selling its offices to reinvest the proceeds into industrial properties.

Last year, this capital recycling wasn't dilutive, but as the market sentiment for office sector continues to deteriorate and cap rates expand, I fear that such future transactions could become dilutive, forcing MDV to cut its dividend.

Moreover, while MDV owns a lot of industrial properties, it is important to note that these properties are not comparable to those of Prologis ( PLD ) or any other industrial REIT. They are riskier, slower-growing, higher cap rate properties such as those targeted by Global Net Lease ( GNL ). They offer a good yield, but they also present greater risks if and when we head into a recession. Today, MDV is heavily concentrated on 5 tenants, and any rent payment issues would immediately put the sustainability of its dividend into question.

Again, the share price is discounted, and MDV could offer attractive long-term return prospects, but I would wait for it to cut its dividend.

Alexander's, Inc. ( ALX )

ALX owns mainly office and retail properties in New York City.

New York is today facing challenges, as many companies have left for Florida/Texas in recent years to escape the high taxes of the state.

Moreover, the physical occupancy of the offices remains low, putting pressure on all types of assets, including retail properties, as lots of people continue to work from home, at least part of the time.

This recently pushed the two other NYC office REITs to cut their dividends.

SL Green ( SLG ) cut its dividend by 13%, and Vornado Realty Trust ( VNO ) cut its dividend by 29%.

The biggest shareholder of ALX is actually VNO. It owns 26% of the company, and so we think that they are likely to push ALX to also cut its dividend.

Today, its dividend payout ratio is already above 100%, and so it isn't sustainable.

Bottom Line

These are three REITs that are likely to cut their dividend, but there are many others. Recently, I posted a video highlighting 5 other REITs that are also likely to cut their dividend.

But remember that there are over 200 REITs out there, and so even if 20 of them cut their dividend, that's just 10% of the REIT sector. Most REITs today continue to grow their dividend. The key is to be selective.

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