5 High-Yielding REITs To Avoid (2024)

Over the past few weeks, I’ve written about worthy REIT investments that have dividends over 6%, and 7%. And last week, my column reached for 8% and higher.

So, where do we go, from here?

When yields get stratospheric, plant your feet, and take a lesson from Greek mythology. Icarus, escaping from the isle of Crete, uses wings his father fashioned from feathers and wax. His father warns him to not fly too close to the water, lest the feathers get damp, and not too close to the sun, lest the wings melt. But Icarus, giddy with flying, ignores the instructions, and, as feathers peel off, and the wax melts, it ends badly for Icarus.

This tale can be helpful to remember, that as REIT yields go way up, and up… so does the risk.

Watch out for what I call “sucker yields” - when the underlying security has a flawed or vulnerable business model, or unpredictable, unreliable earnings histories, or unsafe dividend payouts.

Here are 5 examples, yielding over 9%, that I believe you should avoid. As a real estate analyst, I cover these companies along with much safer REITs, each month in Forbes Real Estate Investor (subscribers will receive the new issue June 1^st).

New Senior Investment Group (SNR) is the highest-paying health care REIT (for now), with a dividend of 13.61%. The company is 100% focused on senior housing, and as of March 31, was one of the largest owners of senior housing properties, with 133 properties across 37 states. The company is externally managed by an affiliate of Fortress Investment Group.

Since NYSE trading began in autumn 2014, common shares have fallen over 60 percent. The company reported a first quarter net loss of $13.3 million with total net operating income (NOI) of $47.1 million. In February, the company’s board, management team and legal/financial advisors announced they’re exploring strategic alternatives to maximize shareholder value, and the review is ongoing. Earlier this month, New Senior agreed to terminate triple net leases with Holiday Retirement affiliates, for which SNR will receive $116 million in total consideration.

The company has been pruning assets to enhance the portfolio’s overall quality, and making progress with asset sales, but not enough to climb out of their predicament. I think they have no ability to grow the dividend, no catalysts to support price appreciation, and no evidence they’ll internalize management operations. Help is needed, such as cutting the high risk dividend.

New Senior’s board makes a decision on the first quarter payout by June 1, and warns the amount may be less than prior quarter dividends, and that the difference could be material.

Whitestone REIT (WSR) pays a monthly dividend yielding 9.54% (annually), and hasn’t increased the dividend since going public in 2010. The company is a small-cap shopping center REIT with 72 community centers, over approximately 6.6 million square feet of space, in six markets: Austin, Chicago, Dallas-Fort Worth, Houston, and Phoenix – fast-growing population centers with highly educated workforces, high household incomes and strong job growth.

WSR has the second-highest median household income (3-mile average) of its shopping center peers. And the company is more of a tactical re-developer, acquiring so-called "broken" centers to “bring them back to life."

My concerns about WSR: they have too-small a grocery concentration (12% of tenants), fail to generate cheap capital by not selling their net lease holdings, and lack geographic diversification (27 properties in Phoenix, and 44 in Texas).

But my biggest problem is WSR’s dividend, of $1.14 per year, with the estimated AFFO per share of $0.97. With a 118% Payout Ratio, they cannot cover the dividend from free cash flow. Bluntly, WSR’s dividend is a “sucker yield.”

Global Net Lease (GNL) has over 313 net lease commercial properties, over 22.3 million square feet, emphasizing “mission critical” income-producing assets across the U.S. (49%), and Western and Northern Europe. The company began trading in June 2015.

Externally managed by AR Global Investments, LLC, Global Net Lease’s executive officers, advisors and affiliates face conflicts of interest in compensation and in allocating time among investment programs. This arrangement also adds complexity risk and an obligation to pay many different kinds of fees, some substantial, to its advisor and affiliates.

The company’s net debt to enterprise value is over 50%, and the WACC (weighted average cost of capital) is far higher than, say, Triple Net champ Realty Income (O). I calculate O’s WACC as 4.8%. But for Global Net Lease, I estimate an 8.66% WACC.

The company’s annual dividend of $2.13, is paid monthly, and yields 11.25%. The payout ratio of over 110% ensures “no margin of safety.”

I believe Global Net Lease cannot compete with peers given its low prospects for earnings growth. And there’s little incentive for GNL to outperform, with the external management team raking in fees under a long-term contract. Investors are risking their capital for a high dividend “sucker yield.”

CBL & Associates Properties, Inc. (CBL), headquartered in Chattanooga, TN, is a mall REIT that owns and manages 117 properties totaling 73.4 million square feet across 26 states, including 75 high-quality enclosed, outlet and open-air retail centers, and 11 properties managed for third parties.

But when they released their third quarter earnings last year, I was not pleased. Then, the company reduced the annual dividend, from $1.06 per share to $0.80, to preserve around $50 million in cash annually and help fund value-adding redevelopment activity and debt reduction.

The dividend decrease was unexpected - many investors appreciated seeing a dividend payout ratio of 55%. But that 3Q report, with lower sales per square foot, worsening leasing activity, and guidance down… well, at least their debt was well-laddered, and within covenant limits.

I shouldn’t have been surprised. The stock had been a “speculative buy” and now, a “sell.” I‘ve not enjoyed watching the share price fall over 80% the past 5 years. But nothing has changed my mind about CBL since 3Q17, most especially their 17.35% annual dividend yield. Yikes.

Apollo Commercial Real Estate Finance, Inc.(ARI) is a mortgage REIT (mREIT). Like banks, they underwrite loans to generate earnings and manage credit risk – essential to a company’s success or failure, and the prime differentiators between the best and worst companies.

The mREIT sector, more volatile than equity REITs, is an excellent barometer for supply & demand and commercial real estate trends – which is currently enjoying some “extra innings,” with strong demand for debt capital from a high volume of refinances, redevelopment, and development.

One downside of investing in mREITs is limited transparency, with investors less informed about the overall quality of income being generated.

At first quarter-end, ARI's commercial real estate debt portfolio of investments, collateralized by properties throughout the U.S. and Europe, totaled $4.1 billion (weighted-average, with an un-levered yield of approximately 9.2%). Operating earnings were $47.8 million, or $0.43 per share.

Apollo’s dividend, unchanged since the end of 2015, was $0.46 per quarter, yielding 9.92%. The board meets in mid-June to discuss the Q2-18 dividend.

I am concerned about Apollo’s enhanced exposure to New York City and surrounding areas, (38% of investments in Manhattan and Brooklyn). I don’t like the company’s exposure to subordinated loans (exceeding its peers). And while Apollo has one of the highest mREIT dividend yields, I’m more risk-averse as we get closer to end of the real estate cycle. If you commit capital to the sector, please own the highest quality originators. Apollo isn’t one.

I do not own shares in any of these REITs.