Those holding REITs have seen their portfolios lag behind in recent years, with the sector struggling under the weight of rising interest rates. The current economic climate has been particularly harsh on REITs, which are feeling the strain from increased borrowing costs and a shift in investor preference towards safer fixed-income assets.
In particular, with rates still hovering above 5%, REITs face intensifying debt financing costs, squeezing their profit margins while remaining less attractive compared to more stable investments like Treasury bills for those seeking income yield. This has led to significant declines in REIT share prices.
While many investors hope that potential rate cuts before the end of the year could revive sentiment in the sector, some REITs continue to seem overpriced and lacking meaningful growth prospects. In this article, we’ll highlight three REITs that investors might want to consider selling before their values decline further. Let’s explore these potential pitfalls.
American Homes 4 Rent (AMH)
The first REIT to consider selling today is American Homes 4 Rent (NYSE:AMH). It specializes in acquiring, developing and managing single-family rental homes. Since its formation, AMH has amassed a portfolio of nearly 59,493 single-family properties across 21 states, focusing on metropolitan sub-markets.
In its recent second-quarter results, AMH posted a relatively substantial revenue increase of 7.1% to $423.5 million, surpassing expectations by $2.6 million. Funds from Operations (FFO) rose to $0.45 per share, up from $0.41 a year ago, and exceeded estimates by $0.02. The company also retained a high occupancy rate of 96.6% and achieved a blended rental growth rate of 5.3%, driven by a 5.7% rise in new lease rates and a 5.2% rise in renewals.
Despite these encouraging numbers and the fact that AMH is expected to post record FFO/share for the year, given management’s guidance, its shares appear overpriced at current levels. At roughly 22x the midpoint FFO/share estimate of $1.76, AMH is one of the most expensive REITs in the market. Its enduring growth in a challenging real estate landscape is commendable, though this multiple is still very rich at present interest rates.
NNN REIT (NNN)
Let’s shift gears from a residential to a retail name, NNN REIT (NYSE:NNN). The company owns and manages around 3,500 single-tenant, net-leased retail properties across the U.S. NNN’s focus on high-quality retail tenants is quite strategic, as such businesses are willing to accept periodic rent increases to avoid the disruption of relocating, providing the company a stable and growing income stream.
This approach has allowed the company to achieve consistent growth with low volatility over the years. Evidently, NNN has maintained exceptionally high occupancy rates in its history, which have typically ranged between 98% and 99%. These qualities were evident in its most recent Q2 results. Revenues rose by 7% year-over-year (YOY) to $216.8 million, while FFO/share grew from $0.80 to $0.83 during this period. Finally, occupancy came in at a sky-high 99.3%, while NNN’s weighted average remaining lease term stood at 10 years, providing excellent cash flow visibility.
Despite these qualities and strong performance overall, the fact that NNN recently hit new 52-week highs with interest rates remaining this high is rather alarming. Today, the stock is trading at a P/FFO of about 14x, which may not seem that expensive. Yet, with consensus estimates pointing toward FFO/share growth in the low-single-digits moving forward, this multiple could imply downside potential.
Regency Centers (REG)
The final REIT on my list is Regency Centers (NYSE:REG), which specializes in retail properties. In particular, Regency owns or has partial interests in 481 properties, primarily anchored by major grocery chains. With about 57 million square feet of prime retail space in affluent and high-traffic locations, the company collects stable cash flows from top-tier tenants like TJX (NYSE:TJX) at 2.8% of annualized rent, Whole Foods at 2.7% and Kroger (NYSE:KR) AT 2.6%.
Regency’s recent Q2 results were strong, with net income growing by 14.4% to $99.3 million, thanks to improved leasing and occupancy rates. The company’s same-property portfolio was 95.8% leased, up 80 basis points from the previous year. Nareit FFO grew by 11.1% YOY to $196.4 million, although FFO per share edged up by just 3 cents to $1.06 due to a higher share count.
Despite Regency’s solid performance and optimistic outlook, which points to FFO/share between $4.21 and $4.25 for FY2024, I find the stock overvalued at its current levels. Now trading at about 16.6 times the midpoint of management’s guidance, the valuation seems high given the lack of meaningful growth in the coming years. Wall Street sees FFO/share growth below 5% per annum over the medium term, which, along with the stock’s modest yield of 3.8%, shouldn’t be enough to thrill anyone.
On the date of publication, Nikolaos Sismanis did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
