On Dec. 13, a major change in investor sentiment toward real estate investment trusts (REITs) took place as the Federal Reserve announced another pause in interest rate hikes and suggested there would be three rate cuts in 2024.
The REIT sector, which has performed well since early November, took off for several days, before pulling back after Dec. 14.
Many low-priced REITs that have been laggards throughout the first 10 months of 2023 are now seeing renewed buying. It seems like investors are buying REITs with ultra-high dividends, believing that a lower interest rate environment will take care of whatever problems these REITs have, generating appreciation as well as a high dividend yield over the next year.
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Take a look at three low-priced REITs that could benefit from the lower interest rate environment, while paying dividends with high yields.
Office Properties Income Trust (NASDAQ:OPI) is a Newton, Massachusetts-based office REIT with 154 properties covering 20.7 million square feet. As of the third quarter, its occupancy rate was 89.9%. Office Properties is externally managed by the RMR Group Inc. (NASDAQ:RMR).
In September, after a great deal of opposition from shareholders, Office Properties Income Trust agreed to terminate its merger proposed in April with RMR Group-managed Diversified Healthcare Trust (NASDAQ:DHC). Since then, that announcement has had a beneficial effect on the share price of Office Properties.
On Nov. 17, Office Properties announced that Christopher Bilotto would be taking over as president and CEO of Diversified Healthcare Trust on Jan. 1. Yael Duffy will be appointed president and chief operating officer of Office Properties, also as of the start of the new year.
On Dec. 12, the day before the Federal Reserve announcement, Office Properties closed at $5.91. Its most recent close was $6.88 for a gain of 16.4%. Over the past month, it's gained 37.32%.
Its present dividend yield is 14.53%, but that's down from over 23% a few weeks ago. The payout ratio is 23.8%, but with $2.57 billion in debt and an operating cash flow of $109 million, a dividend cut is possible in the future. As recently as April, Office Properties cut its quarterly dividend from $0.55 to $0.25 per share. Its last $0.25 quarterly dividend was announced in October and paid on Nov. 16.
Service Properties Trust (NASDAQ:SVC) is a Newton, Massachusetts-based diversified REIT with a portfolio of 221 hotels and 761 service-focused net lease retail outlets that cover 46 states, Puerto Rico and Canada. Service Properties owns many of the travel centers along major U.S. highways. Service Properties is also externally managed by the RMR Group.
On Nov. 6, Service Properties Trust announced its third-quarter operating results. Funds from operations (FFO) of $0.56 per share beat the estimates of $0.54 as well as its FFO of $0.54 in the third quarter of 2022. Revenue of $496.82 million beat the estimate of $489.19 million but was a slight decrease from revenue of $498.25 million in the third quarter of 2022.
Wall Street was unimpressed. One of the problems is that Service Properties is carrying $5.72 billion in high-interest debt, with an 83% debt ratio twice the average of its hotel REIT peers and 2.5 times the average of net lease REITs.
On Nov. 13, Wells Fargo Securities analyst Dori Kesten maintained an Underweight rating on Service Properties and lowered the price target from $8 to $6.50.
However, the Fed announcement this month was a boon to Service Properties, as it may be able to refinance much of its debt at lower rates next year. Before the announcement, it closed at $7.90 but blasted up to $8.60 within three days before pulling back to $8.33. Shares are 21.7% higher since the Nov. 13 low of $6.84.
Service Properties Trust has a present yield of 9.6% and a modest forward payout ratio of 46.5%. Despite the low payout ratio, the dividend could at some point get cut unless Service Properties can refinance its $1.1 billion in debt that matures in 2024.
Medical Properties Trust Inc. (NYSE:MPW) is a Birmingham, Alabama-based healthcare REIT that owns and operates 441 general acute care and other properties across the U.S. and in nine other countries, with locations in Europe and even Australia. General acute care hospitals account for 63.7% of its portfolio, which is valued at $19 billion. About two-thirds of its properties are located in the U.S.
Few REITs have suffered as much from adverse publicity and shaky finances as Medical Properties Trust in 2022. But it's been on fire lately. Its recent close at $4.85 is 22.4% above the low of $3.96 on Nov. 13, and it touched a high of $5.76 on Dec. 14 before pulling back.
On Nov. 29, JP Morgan analyst Michael Lapides maintained an Underweight position on Medical Properties Trust and slashed the price target by 37.5% from $8 to $5.
Like the REITs mentioned above, Medical Properties Trust will need to refinance its heavy debt load. Its yield of 12.37% seems safe enough, as the forward payout ratio is only 38.21%. Lower interest rates will assist this REIT in 2024.
Keep in mind that the short interest on Medical Properties Trust is high at 23%.
All three REITs are quite volatile and may not be well-suited for more conservative investors.
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