Sell Alert: 3 REITs That Could Cut Their Dividend (2024)

Recently, I wrote an article predicting that the following 5 REITs would cut their dividend in the future:

• Medical Properties Trust (MPW)
• Easterly Government Properties (DEA)
• Global Net Lease (GNL)
• Service Properties Trust (SVC)
• Apollo Commercial Real Estate Finance (ARI)

And since many of you seemed to like that article, I am today going to add another 3 REITs to the list.

But before I get into it, keep in mind that these are exceptions. Most REITs are actually growing their dividend payments.

REIT dividends grew in 2022, 2023, and in the first half of 2024, even as their share prices collapsed, and this explains why there are now so many high-yielding opportunities:

But you still need to be selective because not all dividend yields are safe and sustainable. Here are three REITs that are at high risk of cutting their dividend in the future:

Crown Castle (CCI)

CCI is one of the leading cell tower REITs. The other two are American Tower (AMT) and SBA Communications (SBAC).

Typically, these REITs trade at high valuation multiples and low dividend yields because of their highly resilient fundamentals and rapid growth prospects.

But today, CCI is priced at an exceptionally high dividend yield of 6.5% and this represents a big spread relative to its close peers:

But there's a reason for the higher yield.

CCI has a higher payout ratio than its peers, and it also uses a bit more leverage:

Even then, CCI's dividend could be sustainable. The company owns amazing assets, it has an investment grade rating, and it enjoys solid long-term growth prospects.

In fact, the management expects them to return to their historical dividend growth rate of 7-8% per year by 2026.

However, the reason why I think that they are at high risk of cutting their dividend is because there are two activist investor groups that are pushing CCI to sell its fiber assets and refocus on cell towers only.

If they sold these assets, they would lose a portion of their cash flow and I would expect them to then also cut their dividend.

That does not mean that it is a bad thing for shareholders. They would only sell these assets if it helped unlock value, and it would likely lead to even stronger total returns over time.

However, I wouldn't buy it just for the dividend because the risk of a cut is higher than for most REITs.

I am bullish on CCI and see it as a total return investment.

Omega Healthcare Investors (OHI)

OHI is the leading REIT that focuses on skilled nursing facilities.

This is one of the riskiest property sectors with growing tenant issues, especially in the post-covid world. Rent coverage ratios are typically very low in the 1 - 1.5x range, leaving little room for error.

Naturally, these assets also trade at high cap rates to compensate for the higher risk, and historically, OHI has done a very good job investing in this property sector.

It has a great track record, having managed to significantly outperform the rest of the market, and offering a high and growing dividend for 20 years in a row:

But I fear that this streak could soon be coming to an end.

It has faced growing tenant issues following the pandemic, as its tenants faced surging labor costs and missed rent payments.

Moreover, just recently, one of its top tenants, called LaVie Care Centers, filed for bankruptcy. It also did not pay its rent in full in the past quarters.

As a result, its dividend is barely covered, with a ~99% payout ratio that leaves no room for error.

Therefore, if the company faces any additional setback in the near term, I would expect it to cut its dividend, and it would likely hurt the company's market sentiment since so many investors own it for its high 8.1% dividend yield.

I think that the risk-to-reward is relatively poor here because the company is actually quite expensive relative to other REITs facing similar issues, and ruining such a long dividend track record would almost certainly cause its share price to crash.

Maybe they will manage to recover from here without cutting the dividend. But for me to take this risk, I would want a lower valuation and a higher yield than this.

AGNC Investment (AGNC)

AGNC is one of the most popular REITs in the world, and this is well reflected in its large following on Seeking Alpha. The company has 112,140 followers, which is huge for a REIT:

And the reason why it is so popular is pretty simple:

The company is offering a 15% dividend yield, and many appear to think that this yield is sustainable. It has maintained it for 4 years in a row and the dividend seems to be well covered.

I hate to be the bearer of bad news, but if something sounds too good to be true, it probably is.

The company has cut its dividend 8 times ever since it went public in 2008.

That might be a record for a REIT. Do you know any other REIT that has cut its dividend so many times? I don't.

And this really explains why I have no interest in AGNC.

Its business model is highly dependent on macro factors like interest rates and spreads, which are out of its control, and as a result, it keeps going through these boom and bust cycles.

Today, the company's share price is nearly 2x lower than when it went public nearly 20x years ago. Adjusted for inflation, the value destruction has been massive.

So, yes, you get a high yield, but what's the point if it comes with a declining share price?

Another cut is likely just around the corner.

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