2023-10-21 07:00:00 ET
Summary
- Make no bones about it (pun intended), some REITs are downright spooky these days.
- Especially considering the unprecedented amount of central bank intervention that drove markets over the past decade plus.
- REIT valuations are now back to levels last seen 7–10 years ago, and the REIT sector is screaming (pun intended) attractive.
Are you into scary movies?
If so, this is your time of year. A quick look at theater offerings shows:
- The Exorcist: Believer
- Saw X
- Hocus Pocus (a comedy, I know, but it still has its scary appeal).
Or, if you don't feel like leaving your couch, Collider recommends a long list on Netflix, including:
- Run Rabbit Run , a June 2023 release set in Australia
- Texas Chainsaw Massacre - the "ninth installment in the franchise"
- Deliver Us From Evil , a 2014 film that pulls "the audience into all sorts of uncomfortable terror."
Because… ummmm… terror is normally comfortable?
Maybe we shouldn't judge the movie by that head-scratching description. After all, Collider also says it delivers "bone-chilling scares… with intellect" and deeper messaging.
In which case, one could argue it's one of the elite. Most horror and thriller movies aren't exactly cinematic masterpieces.
Though I have to admit I found one site, creepycatolog.com , that describes Scream as "meta-commentary on the whole scary movie and horror genre." It's not "just another silly horror movie" since "the director and screenwriter had a lot of interesting thoughts and ideas playing throughout the film."
Again, maybe. Perhaps defining "masterpieces" in this regard is a bit subjective. Just not subjective enough to rule out the existence of "scary movie cliches."
Those are every bit as in your face as dividend sucker yields and yield traps - the kind of thing you really should see coming every time.
If You Ever Find Yourself in a Scary Movie…
I might have mentioned the scary-movie Geico commercial in last year's Halloween-themed article. Or perhaps it was the year before.
It's an oldie (2014) but goodie regardless, showing a bunch of young adults caught in an obviously dangerous situation. You can tell it's dangerous because it's dark out and they all look scared.
Running through the woods, they come up to a spooky-looking house, where they stop to pant in panic and figure out what to do.
"Let's hide in the attic," one suggests.
"No," another declares, "the basement!"
"Why can't we just get in the running car?" another moans.
That last idea is shot down hard, and so the foursome runs into the barn (or shed?) where rows of chainsaws hang. Even the villain, who gets his two seconds of camera time, looks completely bewildered by how stupid their decision is.
There are just certain things you do not do in a horror movie if you want to survive.
The aforementioned Scream lists three rules to surviving a horror movie:
- No. 1: Never have sex.
- No. 2: Never drink or do drugs.
- No. 3: Never ever, ever under any circumstances say, "I'll be right back."
But really, with all due respect to Creepy Catalog's perspective on Scream 's superiority, I think there are a lot more rules than that.
For example, don't trip. If you trip, you die.
Don't get on a dying phone or any phone when you know you have bad cell service. If the connection goes out for any reason whatsoever, you die.
And don't split up. If you split up, you die.
This isn't rocket science, right? It's common sense. Yet horror movies show one person after another after another making these death-inducing moves.
Perhaps because they think something along the lines of, "This time is different."
If You Ever Find Yourself in a Scary Market…
Here are two more rules to follow in case you ever find yourself in a scary movie situation:
- Don't leave your place of safety to check out the weird noise outside. Or in the attic. Or in the basement.
- Don't call a friend for help instead of the cops.
Again, this advice makes sense. Even if you probably (hopefully) never find yourself in a situation where you need to use it.
Much more likely, you need two rules in case you ever find yourself in a scary market situation:
- Don't skimp on the research. Check the stock's numbers. Check its management. Check its past, present, and potential. If the results don't add up, don't buy.
- Don't get dazzled. Not by what you see. Not by what they say. If it looks too good to be true, it probably is. In which case, don't buy.
Sounds reasonable? Of course it does!
But in defense of both investors who make mistakes in the heat of the moment and scary movie characters who act foolishly when faced with "uncomfortable" levels of terror…
It's easy to get distracted away from implementing good advice. As I already hinted at, sometimes a dividend yield is so high, it's dazzling.
Other times, a well-known "expert" sounds especially passionate about a certain stock. Or you - or your neighbor, or your colleague, or your colleague's best friend's neighbor who "knows this kind of stuff" - has a "feeling" about a company.
Look, feelings are great. They're even useful. But you need to combine them with facts.
If you don't, someone else might someday stare at the story of your life, shaking their head while shouting, "Run, you fool!"
Right as you do the exact opposite and catastrophe strikes.
Now check out these scary REITs...all tricks, no treats.
EPR Properties ( EPR )
EPR Properties is a net-lease real estate investment trust ("REIT") that primarily invests in experiential real estate.
Their portfolio of experiential real estate includes movie theaters, eat & play facilities, attractions such as amusement parks, fitness centers, ski resorts, experiential lodging, and cultural attractions such as museums.
In addition to their portfolio of experiential real estate, EPR has a portfolio of educational properties that consists of early childhood education and private schools.
EPR's education properties only contributes 7% of their adjusted EBITDAre while their experiential properties contribute 93%.
Movie theater real estate is EPR's largest property type with this category contributing 40% of their adjusted EBITDAre, while eat & play is their second largest property type as this category contributes 24% of their adjusted EBITDAre.
Movie theaters and eat & play venues combined makes up 64% of EPR's adjusted EBITDAre and makes up 228 out of their 290 experiential properties.
Per their latest presentation, EPR's strategic focus is to reduce their exposure to movie theaters, early childhood education, and private schools, while increasing their exposure to all of their other experiential categories.
As of the end of the second quarter, EPR's experiential portfolio totaled 20.1 million square feet and was 98% leased and their educational portfolio totaled 1.4 million square feet and was 93% leased.
Similar to EPR's concentration in movie theaters and eat & play venues, the company has high tenant concentration, particularly in their top 3 tenants AMC Theaters, Topgolf, and Regal Entertainment which contributed 13.8%, 13.7% and 12.7% respectively to EPR's total revenue during the second quarter.
Additionally, 3 out of their top 4 tenants operate movie theaters and made up 32.6% of EPR's second quarter revenue. I see the industry and tenant concentration being a real headwind for EPR.
It's no secret that movie theaters have been struggling since the pandemic and the rapid adoption of streaming services will continue to pressure the industry.
As a matter of fact, Regal Entertainment just recently emerged from its Chapter 11 bankruptcy that it filed in September 2022 and surrendered multiple properties as part of its restructuring agreement.
In addition to the uncertainty related to the movie theater industry is the potential for a recession. EPR will suffer during a recession more than other net-lease REITs due to the discretionary nature of its properties.
If and when a recession comes, people will continue to shop at convenience and grocery stores but will likely reduce their spending on activities such as going to the movies or hitting golf balls at the range.
EPR - IR
Looking at EPR's adjusted funds from operations ("AFFO") and dividend history shows how severely they were impacted by the Covid pandemic with their AFFO per share falling by approximately -65% and their dividend being cut by approximately 66% in 2020.
Over the last decade EPR has kept a fairly conservative AFFO payout ratio and at the end of 2022 they had an AFFO payout ratio of 66.46%. However, without the 66% dividend cut, their 2022 year-end AFFO payout ratio would be closer to 92%.
EPR dividend yield is 7.77% with monthly distributions. The dividend is currently well covered by the company's adjusted funds from operations, but as previously mentioned, that's due to the massive cut they made in 2020.
EPR did increase their dividend by over 100% in 2022, going from $1.50 to $3.25 per share, but even after the increase their expected 2023 dividend is $3.30 per share compared to $3.16 per share 10 years ago.
While the stock is trading at a discount with a P/AFFO of 8.21x compared to their average AFFO multiple of 13.47x, we see the discount as warranted with the concerns we have over EPR's industry and tenant concentration, as well as their dependence on movie theater operators in general.
We rate EPR Properties a Sell.
Global Net Lease, Inc. ( GNL )
After its merger with The Necessity Retail REIT, Global Net Lease has become the third largest net-lease REIT with international exposure.
GNL acquires and manages a portfolio of net-lease properties located in the United States, the United Kingdom, Canada, France, Germany, the Netherlands, Spain, and Italy.
The majority of their rent is generated from the U.S. and Canada with 80.3% of their straight-line rent ("SLR") derived from the United States and Canada, and 19.7% of their SLR derived from Northern and Western Europe.
As of their most recent post-merger update, GNL's portfolio consists of 1,308 properties covering 66.9 million square feet that are 96% leased and have a weighted average remaining lease term of 6.9 years.
Based on straight line rent, 31% of GNL's portfolio is composed of single-tenant industrial properties, 28% is composed of multi-tenant retail properties, 21% is composed of single-tenant retail properties, and 20% of their portfolio is composed of single-tenant office properties.
GNL is well diversified by tenant with their top tenant (McLaren) only contributing 2.7% of their SLR and their top 10 tenants only contributing 19.7%. Approximately 57% of their tenants have investment grade credit ratings, roughly 35% are non-investment grade and 9% are not rated.
The recent merger internalized GNL's management, which may help their performance, but the company's past track record under its external management has been dismal at best.
In 2017 GNL's AFFO fell by -7%. Then it fell by -13% in 2019, by -3% in 2020, by -1% in 2021, by -6% in 2022 and analysts expect AFFO to fall by an additional -7% in 2023.
In 2017 GNL's AFFO per share was reported at $2.10 but fell to $1.60 per share by 2022. Likewise, GNL paid a dividend of $2.13 per share in 2017, compared to a dividend of $1.60 per share in 2022.
Since 2017 the REIT has averaged a negative AFFO growth rate of -3.26% and has averaged a negative dividend growth rate of -4.45%. To make matters worse, as shown below, since 2017 GNL's AFFO has barely covered or did not cover the dividend.
The AFFO payout ratio exceeded 100% in 2017 and 2018 but then came down to 96.22% in 2019 due to the -16.67% dividend cut they made that same year. In 2020 they cut the dividend by -2.39% and then cut the dividend again by -7.65% the following year.
Even after multiple dividend cuts GNL's AFFO is expected to come in at $1.56 per share in 2023 and the REIT is expected to pay a dividend of $1.55 per share. If these projections hold up, then GNL's AFFO payout ratio in 2023 would increase to 99.36%.
FAST Graphs (compiled by iREIT®)
It appears that GNL is addressing the high payout ratio with another dividend cut. Their latest quarterly dividend was declared at $0.354 per share, compared to the previous quarter's dividend of $0.40 per share.
Assuming GNL maintains the quarterly dividend of $0.354 per share, it would annualize to approximately $1.42 per share, which would represent a dividend cut of approximately 8.4% in 2024, compared to the dividend paid in 2023 of $1.55 per share.
GNL's stock is currently trading at a discount with a P/AFFO of 5.27x compared to their average AFFO multiple of 9.35x. The stock also pays a whopping 17.02% dividend yield.
While a yield of 17% is tempting, we see this as a sucker yield and expect GNL to cut its dividend further unless they can increase their AFFO per share.
However, as previously mentioned, their past track record has been dismal with AFFO falling in 5 out of the last 6 years so we are not counting on improved earnings and expect that AFFO will continue to decline, which will lead to further dividend cuts.
We rate Global Net Lease a Hold.
Granite Point Mortgage Trust Inc. ( GPMT )
Granite Point is a mortgage REIT ("mREIT") that originates, manages, and invests in floating-rate senior first mortgage loans that are secured by institutional quality commercial real estate.
GPMT's portfolio consists of 82 loan investments totaling $3.3 billion with an average loan balance of approximately $37.9 million and a weighted average stabilized loan-to-value ("LTV") of approximately 62.9%.
GPMT's portfolio of investments is exclusively made up of loans, 99% of which are senior loans and 98% of which are floating rate loans. In total GPMT generates a 8.2% realized loan portfolio yield and has a 7.8% cost of funds for a spread of approximately 40 basis points.
The commercial properties securing GPMT's loans are well diversified across the United States with 24.5% of their collateral located in the Northeast, 22.6% located in the Southeast, 22.0% located in the Southwest, 16.2% located in the Midwest, and 14.7% located in the western region of the U.S.
GPMT's loans are secured by multiple property types including office, multifamily, retail, hotel, and industrial. The majority of their loans are secured by office properties which makes up 41.8% of their collateral, followed by multifamily which makes up 30.9%. Combined these 2 property types secure more than 70% of GPMT's loan portfolio.
GPMT - IR
The chart below should make this pretty apparent, but GPMT's management team has done a very poor job of creating value with the mortgage REITs adjusted operating earnings falling from $1.40 per share in 2019 to $0.28 per share in 2022.
The company's EPS fell by -8% in 2019, by -16% in 2020, by -15% in 2021 and by -72% in 2022! The dividend track record has been just as bad with a dividend of $1.68 per share in 2019 compared to $0.95 per share in 2022.
To put this in perspective, GPMT has had a negative adjusted operating earnings growth rate of -34.59% and a negative compound dividend growth rate of -12.49% from 2019 to 2022.
Analysts expect earnings to increase by 68% in 2023, giving the mortgage REIT a blended negative adjusted operating earnings growth rate of -14.29% since 2019.
Additionally, GPMT's dividend has only been covered by their adjusted operating earnings in 1 out of the last 4 or 5 years depending on whether you use the 2023 estimates or not. In 2019 their payout ratio stood at 120%.
The following year GPMT cut their dividend by -61.31% which brought the dividend payout ratio to 55.56%. In 2021 GPMT's earnings fell by -15% but they increased the dividend by 53.85%.
The reduction in earnings and increased dividend brought GPMT's dividend payout ratio back over 100% in 2021 and then in 2022 their earnings fell by -72% which brought the dividend payout ratio all the way up to 339.29%. Yikes!
As previously mentioned, analysts project earnings to increase by 68% in 2023 which would reduce the dividend payout ratio to 170.21%, but this is still unreasonably high and unsustainable over the long term.
FAST Graphs (compiled by iREIT®)
Granite Point Mortgage Trust is trading at a discount with a P/E ratio of 9.80x compared to their average P/E ratio of 12.25x, but again we believe the discount is warranted.
The stock pays a 18.91% yield but with an expected 2023 payout ratio of 170.21% we don't believe the dividend is sustainable and expect further dividend cuts in the near future.
We recommend investors avoid Granite Point Mortgage Trust.
Don't Get Spooked by All REITs
Make no bones about it (pun intended), REITs are downright spooky these days.
Just take a look at the chart below:
When will rates pause?
Your guess is as good as mine.
While the markets are returning to an "old normal" of higher rates and higher inflation, we understand that investors are nervous.
Especially considering the unprecedented amount of central bank intervention that drove markets over the past decade plus.
Valuations are now back to levels last seen 7-10 years ago, and the REIT sector is screaming (pun intended) attractive.
However, REIT investors should remember that REIT fundamentals are on solid footing (same-store NOI growth)
By adopting asset-allocation targets that dovetail with personal risk tolerances, you can vastly increase the odds of success.
Remember, no tricks (sucker yields) for Halloween...
Just sweet REIT treats!
For further details see:
Trick Or Treat: 3 Spooky REITs