2023-10-07 07:00:00 ET
Summary
- The stock market is experiencing significant volatility.
- The increase in job openings fueled concerns about a tight labor market and the potential for the Federal Reserve to maintain high interest rates.
- Investors should be cautious and avoid stocks with high dividend yields that may be too good to be true as they often indicate underlying issues with the company's fundamentals.
Well, isn't this week shaping up to be something to talk about?
I could quote any stock market source I know of to prove as much, but let's go with Reuters this time. On Tuesday (Oct. 3), in " S&P 500 Ends at Lowest Since June 1 as Data Fuels Rate Worries ," it writes:
"The S&P 500 Index closed at its lowest level since June 1 on Tuesday as economic data underscored the view the Federal Reserve may need to keep interest rates high.
"The Dow turned negative for the year for the first time since June and ended at its lowest level since May 31. The Nasdaq also closed at its lowest since May 31."
Why? Because:
"Data showed U.S. job openings unexpectedly increased in August, fueling worries about a tight labor market ahead of Friday's key U.S. monthly jobs report."
Job openings came in at 9.61 million - almost 700,000 above July's figure and even more intensely higher than the 8.8 million expected.
All told, it seems clear that people are pretty panicked and don't know what in the world is going on.
Caution and Crystal Balls
I understand that kind of fear. I don't subscribe to it, mind you, but I understand it.
After all, I can't predict the future. It's not a skill I have.
Could I study up on the subject to make up for my natural lacking? I very much doubt it.
Unlike what the maxim promotes, an old dog can learn new tricks. We're always capable of achieving new levels of education of some kind.
But there are some subjects that are impossible for me to make any progress in.
First off, I got my degrees in business and economics, not medium studies. (Mediumism? Mediumity?) Moreover, the last time I built my fortunes off predicting how things would go, I lost out enormously.
Turns out, I'm really bad at predicting the future.
Back in my commercial real estate development days, I expected the economic sun would always shine on my business opportunities. I faced hardships and frustrations, mind you, including a dirty-dealing financial partner who almost bankrupted me.
But I saw the larger sector I worked in as a bull running with limitless energy. There was no stopping commercial real estate demand!
Until, of course, it came to a crashing halt. And I had to rethink absolutely everything I thought I'd known.
As painful as that was, my regular readers know I'm ultimately exceptionally grateful for that journey. I love my new life researching and recommending real estate investment trusts (REITs) and other dividend-paying securities.
It taught me to be more cautious - to be much, much, much more wary of hype - and to treat my money with respect instead of throwing it at every flashy thing that catches my eye.
Those realizations have served me immensely. That and the fact that predicting the future isn't possible.
A Sure Bet Un-Investment
I no longer bet everything on a single investment, category, or concept.
Even when something seems like a sure thing or features a potential opening to amazing profits… "sure things" don't exist in the investment world.
Or in the intertwined economic or political worlds, for the record.
I can't promise a stock is going to the moon. I can't guarantee when rates will drop or who will win the next presidential elections.
And neither can you.
We can only make educated guesses. The more education we have on the topics we seek to act on, the better our chances of being right.
Better but still not perfect.
Have I made my point clear?
Good!
In that case, let me point out one exception to the "you don't and can't know everything" investment rule.
While I absolutely, completely, 100% stand by my statements about not being able to pick out winners every single time… you don't need a medium studies degree to spot a sucker yield.
Sucker yields are those stocks with dividend-to-share-price ratios that look too good to be true. Because they are.
I can't think of a single time I've had to say "Oops! Sorry. I was wrong. You could have made an actual fortune" off something I labeled a sucker yield.
High dividend yields aren't always warnings signs to stay away. Sometimes a strong company has to battle bad PR, leading to devalued shares and an elevated offering.
But when a company's fundamentals don't back what it promises to pay out, it's a sure bet you don't want any part of it.
Hopefully you saw my latest article on the so-called "everlasting gobstoppers," and as promised, now I'm shining a light on the so-called "sucker yields."
Global Net Lease ( GNL )
On Sept. 12 Global Net Lease closed the previously announced merger agreement with The Necessity Retail REIT (RTL), which increased GNL's property count from 317 to 1,308 and their total square footage from 39.6 million to 66.9 million.
The combined company now trades under GNL and has become the third largest net lease REIT with a global presence. GNL specializes in acquiring and managing a portfolio of properties that are located around the globe which are typically leased on a net-lease basis.
GNL has net-lease assets located in the United States, Canada, the United Kingdom, Germany, France, Italy, Spain, and The Netherlands. As a percentage of straight line rent ("SLR"), 80.3% is derived from the U.S. and Canada, while 19.7% is derived from Western and Northern Europe.
As seen below, GNL's portfolio is 96% leased with a weighted average remaining lease term of 6.9 years and 80% of the leases have contractual rent increases.
As a percentage of SLR, 31% of their portfolio is made up of single-tenant industrial properties, 28% is made up of multi-tenant retail properties, 21% is made up of single-tenant retail properties, and 20% is made up of single-tenant office properties.
Additionally, 57% of tenants are investment-grade, while 35% are non-investment-grade, and 9% are not rated.
The merger that recently closed increased GNL's portfolio size and diversity and internalized their management, but there were several objections to the merger due in part to the amount of shares and cash the former external manager (AR Global) received in the transaction.
While it remains to be seen what impact the merger will have on GNL, what we do know for sure is that GNL's past performance has been poor, to say the least. From 2017 to 2022, GNL's adjusted funds from operations ("AFFO") fell from $2.10 to $1.67 per share.
Over that time period they only had one year of positive AFFO per share growth (+1%), which was followed by AFFO per share falling by -13%. Analysts expect AFFO per share to fall by -6% in 2023, going from $1.67 to $1.57 per share.
Global Net Lease's dividend track record has not been any better, with the dividend falling from $2.13 per share in 2017 to $1.60 per share in 2022. Over this time period GNL did not increase the dividend once, but they cut it by -16.67% in 2019, by -2.39% in 2020, and then by -7.65% in 2021.
They maintained their dividend of $1.60 per share in 2022, but analysts expect the dividend to be cut by another -3.13% in 2023.
What's worse is that the dividend is still in trouble with GNL's 2022 year-end AFFO payout ratio at 95.81%, which is expected to increase to 98.73% in 2023.
While GNL has improved its AFFO payout ratio since 2017 when it stood at 101.28%, it's still dangerously high and the only reason it's now below 100% is the three consecutive dividend cuts the company made in 2019, 2020, and 2021.
The important point to stress is that GNL has not improved its dividend payout ratio due to earnings growth, but rather multiple dividend cuts.
Since 2017 GNL has had an average negative AFFO growth rate of -3.26% and an average negative dividend growth rate of -4.45%. The REIT pays a high dividend yield of 15.98% but we don't believe the dividend is safe as GNL is expected to have an AFFO payout ratio close to 100% in 2023.
Analysts do expect AFFO per share to increase by 4% in 2024 and the stock is trading well below its average AFFO multiple, with a current P/AFFO of 5.56x, compared to their normal AFFO multiple of 9.35x.
We rate Global Net Lease a Hold.
Granite Point Mortgage Trust ( GPMT )
Granite Point Mortgage Trust is an internally managed mortgage REIT ("mREIT") that primarily specializes in originating, managing, and investing in senior floating-rate commercial mortgage loans that are collateralized by commercial real estate.
GPMT has a $3.3 billion portfolio made up of 82 loan investments with a weighted average loan-to-value ("LTV") of 62.9%. The portfolio is entirely made up of loans, of which 99% are senior loans and 98% are floating rate loans and in total their loan investments generate a 8.2% realized loan portfolio yield.
GPMT's loans are secured by commercial properties that are well diversified by region and to a lesser extent property type.
Their collateral is evenly spread out across the United States with 24.5% of their investments in the Northeast, 22.6% in the Southeast, 22.0% in the Southwest, 16.2% in the Midwest, and 14.7% in the Western region of the country.
The company also has diverse property types securing their loans, but the bulk of their loans are secured by office properties (41.8%) and multifamily properties (30.9%). Their smaller property types include retail at 9.3%, hotels at 8.7%, and industrial properties at 6.4%.
Granite Point Mortgage Trust's management team has had a dismal track record of creating value over the last several years. The company's adjusted operating earnings fell from $1.40 per share in 2019 to just $0.28 per share in 2022.
Over this time period, GPMT's EPS fell by -8% in 2019, -16% in 2020, -15% in 2021, and then by -72% in 2022. Analysts do expect a sharp rebound in 2023, with adjusted operating earnings expected to increase by 100%, to $0.56 per share, but even if this pans out, the 2023 expected EPS pales in comparison to what the company earned just several years ago.
GPMT's dividend has followed suit, going from $1.68 per share in 2019 to $0.95 per share in 2022. In 2020, GPMT cut its dividend from $1.68 to $0.65 per share, representing a -61.31% dividend cut.
The following year they increased the dividend by 53.85%, to $1.00 per share, but then cut the dividend again by -5.00% in 2022. Analysts expect the 2022 dividend of $0.95 per share to be cut to $0.80 per share in 2023 which would represent a -15.79% dividend cut.
In addition to their falling earnings and reduced dividend, GPMT has an unreasonably high dividend payout ratio based on adjusted operating earnings.
Their dividend payout ratio improved from 120.00% in 2019 to just 55.56% in 2020, but that's due to the massive -61.31% dividend cut rather than improved earnings growth.
In 2021 GPMT's earnings fell by -15% but they increased the dividend by 53.85% which put the dividend payout ratio at more than 100%. In 2022, the adjusted operating earnings per share fell by -72%, but they only cut their dividend by -5.00% which put their dividend payout ratio at a whopping 339.29%....
Analysts expect earnings to come in at $0.56 per share in 2023, vs. a dividend of $0.80 per share which would still leave the dividend payout ratio unreasonably high with the 2023 payout ratio expected to be around 143%.
FAST Graphs (compiled by iREIT®)
Since 2019 GPMT has had a negative blended adjusted operating earnings growth rate of -13.60% and a negative compound dividend growth rate of -12.49%. The stock pays a 18.06% dividend yield, but this looks like a sucker yield to us.
GPMT delivered negative earnings growth from 2019 to 2022 and has a history of cutting the dividend. With the 2023 expected dividend payout ratio of 142.86% we think it's likely that another cut is around the corner.
Currently the stock is trading at a P/E of 9.01x, compared to the normal P/E ratio of 12.25x, but in this case we believe the discount is warranted and recommend that investors avoid this stock.
We recommend investors avoid Granite Point Mortgage Trust.
Annaly Capital Management ( NLY )
Annaly Capital Management is a mREIT that's internally managed and specializes in mortgage financing through three main investment groups: Annaly Agency Group, Annaly Residential Credit Group, and Annaly Mortgage Servicing Rights Group.
NLY's largest group is the Annaly Agency Group which invests in Agency mortgage-backed securities ("MBS") that are secured by residential mortgages and are guaranteed by government-sponsored enterprises ("GSEs") such as Fannie Mae and Freddie Mac.
Their Mortgage Servicing Rights Group invests in mortgage servicing rights ("MSRs"), which enables NLY to service residential loans and receive a portion of the interest payments made, and their Residential Credit Group invests in Non-Agency residential loans through both securitized instruments and whole residential loans.
NLY's primary business is to generate net income by generating a net interest spread on its portfolio of debt investments. As of the most recent update, NLY has a $78.9 billion investment portfolio consisting of $71.4 billion in assets in their Agency portfolio, $2.2 billion in assets in their Mortgage Servicing Rights portfolio, and $4.9 billion in assets in their Residential Credit portfolio.
As shown below, from 2013 to 2022 NLY's adjusted operating earnings has remained relatively flat with EPS of $4.84 in 2013 compared to EPS of $4.23 in 2022. However, analysts expect EPS in 2023 to fall from $4.23 to $2.92, representing a -31% decline.
Earnings growth has been volatile over the past decade with EPS falling in six out of the last 10 years. As previously mentioned, analysts expect a sharp decline in earnings in 2023, and then expect a moderate decline of -3% in 2024.
NLY's dividend track record looks even worse, with a dividend of $6.00 per share in 2013 compared to a dividend of $3.52 per share in 2022. Since 2013, NLY has never increased its dividend and has cut it five times. They cut the dividend by -26.83% in 2013, by -20.00% in 2014, by -12.50% in 2019, by -13.33% in 2020, and by -3.90% in 2021.
To put it in perspective, if you bought shares of NLY in 2013 your initial yield on cost would amount to 10.11%, but by 2022 your yield on cost would have been reduced to 5.93% due to all the cuts. Additionally, analysts expect a -26.13% dividend cut in 2023, going from a dividend of $3.52 in 2022 to a dividend of $2.60 in 2023.
This projection looks to be on the mark as NLY cut its quarterly dividend from $0.88 per share in the fourth quarter of 2022 to $0.65 per share for both the first and second quarter of 2023.
Based on adjusted operating earnings, NLY has had a dividend payout ratio of more than 100% in five out of the last 10 years. The payout ratio got as low as 75.86% in 2021 but increased to 83.22% in 2022 and is expected to increase to 89.04% in 2023.
While a payout ratio under 90% is pretty good for a mortgage REIT, the only reason it's under 100% is due to all the dividend cuts. As with the previous two REITs we've looked at, NLY did not achieve a dividend payout ratio under 100% due to earnings growth.
Since 2013 NLY has had a negative blended adjusted operating earnings growth rate of -5.67% and a negative compound dividend growth rate of -8.11%. The stock currently pays a 14.55% dividend yield but we see this as unsustainable.
Even with the expected payout ratio of 89.04% in 2023, NLY's earnings trajectory has been on a downward spiral and won't support the dividend if this trend continues.
The stock is trading at a discount, with a current P/E ratio of 5.51x compared to the 10-year average P/E ratio of 8.29x, but management has shown the ability to destroy value over the last decade and we expect this to continue.
We rate Annaly Capital Management a Sell.
Avoid these Sucker Yields, Charlie Brown
Earlier I provided you with a definition of a "Sucker Yield" and now I'll provide you with another frequently used acronym known as "SWAN."
Clearly, sucker yielding stocks are not worth owning, and I would be especially mindful of avoiding them now as fear has been elevated due to higher cost of capital and lingering debt maturities.
That's why - more than ever - our team will be pounding the table for SWAN stocks, recognizing that blue chip bargains are becoming increasingly enticing.
We like the REIT Treats more than anyone, but I'll tell you just like I told Charlie Brown, " avoid these sucker yields."
Note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: Written and distributed only to assist in research while providing a forum for second-level thinking.
For further details see:
I Love REIT Treats, But Avoid These 'Sucker Yields,' Charlie Brown