Many REITs are struggling with high levels of debt on their balance sheets. As economic conditions have deteriorated, their cash flows have come under immense pressure, making it challenging to service these debts. The shift towards remote work and the ongoing challenges facing brick-and-mortar retail have led to high vacancy rates and reduced rental income for these REITs.
Additionally, these REITs are facing increasingly competitive positions in their respective markets. New supply of commercial real estate, whether it be office buildings, shopping malls, or hotels, is adding pressure and making it harder for these REITs to maintain occupancy and rental rates.
Investors should pay close attention to the REITs to sell in April and also reconsider their investments in these companies. I feel that the worst has yet to come for them.
Orion Office REIT (ONL)
Orion Office REIT (NYSE:ONL) is grappling with high debt levels and significant asset dispositions, which raise concerns about its long-term financial stability.
In 2023, ONL experienced a decrease in total revenues, from $208.1 million in 2022 to $195 million. Core Funds from Operations (FFO) declined to $94.8 million, or $1.68 per share, from $108.2 million, or $1.91 per share in 2022.
For 2024, ONL provided guidance estimates with a Core FFO per share range of $0.93 to $1.01 and general and administrative expenses between $19.5 million and $20.5 million. The net debt to adjusted EBITDA ratio is anticipated to be between 6.2x to 7.0x.
However, even if ONL is able to meet its guidance, these numbers put the company in a precariously leveraged situation financially. This in turn might be enough for investors to question whether it’s smart to invest funds in ONL.
Hudson Pacific Properties (HPP)
Hudson Pacific Properties (NYSE:HPP) is facing financial challenges with declining revenues and increased operating costs.
The company’s FFO dropped to $19.6 million or $0.14 per diluted share, down from $70.2 million or $0.49 in the previous year. Adjusted Funds From Operations (AFFO) also declined to $21.5 million or $0.15 per diluted share. Looking ahead to 2024, HPP has set its FFO guidance between $1.00 and $1.10 per diluted share.
Although the company’s futures in the very short-term could be looking up via positive guidance from management, some credit rating agencies have taken an alternative view, and could see it as a risky investment.
For example,Fitch Ratings has affirmed HPP’s Issuer Default Rating (IDR) at ‘BBB-‘, with a preferred stock rating at ‘BB’. However, the rating outlook was revised to negative from stable.
HPP then could be one of those risky REITs to avoid, especially as there are much better options out there on the market.
Global Net Lease (GNL)
The challenges for Global Net Lease (NYSE:GNL) include a negative AFFO growth and declining dividend trend. For example, the REIT’s dividend growth rate is a negative 13% at the time of writing, while its dividend yield sits at an unsustainable (relative to earnings) 13%.
Things looked bad for the fourth quarter. The company reported revenue of $206.7 million, with a net loss of $59.5 million, or $0.26 per diluted share. The net operating income (NOI) stood at $169.7 million, while FFO were $48.3 million.
There is also some liquidity and long-term concerns around its debt. It has 5 billion in debt and just over 162 million in cash and cash equivalents. Since it’s already highly leveraged, its shares outstanding have risen over 30% year-over-year, in an apparent bid to shore up liquidity.
I don’t see a way out for GNL to continue its unsustainable dividend with that large amount of debt, which makes it one of those REITs to sell before the worst comes to worst.
On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Matthew started writing coverage of the financial markets during the crypto boom of 2017 and was also a team member of several fintech startups. He then started writing about Australian and U.S. equities for various publications. His work has appeared in MarketBeat, FXStreet, Cryptoslate, Seeking Alpha, and the New Scientist magazine, among others.