Real estate investment trusts (REITs) have essentially one job to do for their investors – pay reliable dividends. Many do, but when firms find their payouts in jeopardy things get ugly in a hurry. Which is why you need to avoid, or sell, the five ticking time bombs we’re going to discuss today.
Dividend cuts don’t just “happen.” When a REIT slashes or suspends its dividend, it’s rarely a surprise – and rarely an isolated incident.
Let’s consider Armour Residential REIT (ARR) – here’s five years of dividend cuts and misery:
Sure, the current yield for Armour always looks good at 10% or higher. Problem is, its payout can’t be trusted. And neither can these five unsustainable dividends.
Global Medical REIT (GMRE)
Dividend Yield: 8.8%
On its face, Global Medical REIT (GMRE) would look like a no-brainer buy – after all, it’s a nearly 9% yielder that plays in the ever-growing megatrend of healthcare?
But GMRE is an odd bird with some serious problems.
First off, Global Medical REIT comes from strange beginnings. The company started in 2011 as an internet dating site reviewer called Scoop Media, then was bought out in 2013 by Hong Kong real estate company ZH International Holdings. The company then turned Scoop Media into Global Medical REIT – a Maryland corporation that buys healthcare facilities, then leases them out under long-term triple-net leases – which then went public in June 2016.
So far, no good.
While the company’s revenues have exploded over the past year, its net losses have ballooned, too, from $1.61 million to $6.35 million. That filtered down to funds from operations (FFO) – an important measure of operational results that’s also useful in determining the integrity of the dividend – of negative 3.98 million in 2016, more than four times worse than its 2015 number! Adjusted FFO of negative 3 cents per share is troubling, considering GMRE pays out 20 cents per share per quarter in dividends.
This stock is untested and off to a rough operational start, which is why it’s off 10% since its IPO – twice as bad as the broader REIT market.
Even a Nearly 9% Dividend Can’t Carry Global Medical REIT (GMRE)
AGNC Investment Corp. (AGNC)
Dividend Yield: 10.7%
AGNC Investment Corp. (AGNC) is an established player among mortgage real estate investment trusts (mREITs), but this high-yield name has struggled over the past few years, and its dividend looks downright wobbly at the moment.
AGNC primarily invests in agency mortgage-backed securities – which are issued by government-sponsored groups such as Fannie Mae or Freddie Mac. The company finances these typically through short-term secured loans referred to as “repurchase agreements.” And it does so at quite a bit of leverage – in fact, as of the end of 2016, AGNC boasted a tangible net book value “at risk” leverage ratio of 7.7x, much higher than many of its competitors.
That’s up from 6.8x at the end 2015, cranked up in part to help finance the purchase of its external manager, American Capital Mortgage Management, which closed last July. Worse, the company also reduced its monthly dividend from 20 cents to 18 cents so it could better afford the $562 million deal … and that’s after reducing the dividend from 22 cents to 20 cents in 2015!
AGNC is struggling to find financial footing, and its dividend track record is far from stellar. Avoid this at all costs – there are better ways to get high yield.
AGNC Investment Corp. (AGNC): This Is NOT What a Dividend Chart Should Look Like!
iShares Mortgage Real Estate Capped ETF (REM)
Dividend Yield: 9.7%
Exchange-traded funds (ETFs) can provide a number of benefits to investors, not the least of which is cheap, simple portfolio diversification. The iShares Mortgage Real Estate capped ETF (REM), however, is one of the best examples of when that diversification can come back to bite you in the rear.
The REM is an ETF that holds a number of mREITs, and it carries a couple of gems, including Blackstone Mortgage Trust REIT (BXMT) and Apollo Commercial Real Estate Finance (ARI). However, combined they make up just about 8% of the fund’s weight. Drowning them out are Annaly Capital Management (NLY) – which I consider to be one of the most dangerous dividends of 2017 – and the aforementioned AGNC. Together, those two stocks account for more than a quarter of the fund’s performance! You’re better off picking a couple of individual winners and not letting your returns get weighed down by a crowd of losers.
iShares’ REM Holds Back the Real Stars
You see this dynamic play out in a number of international real estate ETFs, too. iShares International Developed Real Estate ETF (IFGL) and SPDR Dow Jones International Real Estate ETF (RWX) can yield in the 7% to 8% range, but their wide portfolios let in too much riff-raff, and their dividends are inconsistent to boot. Avoid these as well.
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