Crushed REITs: Are they a bargain or a yield trap?

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The oldest investing advice on Wall Street is to buy low and sell high. But the problem is that you never know for sure where the lowest or highest prices are.

Regardless of price, with real estate trusts (REITs), buying low can often mean buying a stock for life with a high dividend yield. Will that high dividend yield disappear soon with bad dividend cuts, or is this an opportunity to lock it up for the long term?

Here's a look at three REITs that have been crushed in price over the past four weeks and now sport dividends much higher than their five-year averages. Are they a yield trap or a bargain? The following information may help you decide.

Unity Group Inc. (NASDAQ: UNIT) is a Little Rock, Arkansas-based specialty REIT that acquires and builds mission-critical communications infrastructure in the form of fiber optics, copper and coaxial broadband networks.

Uniti Group currently owns and operates 129,000 fiber route miles covering 270,000 commercial buildings, with most of its network in the Eastern and Midwestern US, making it one of the 10 largest fiber providers in the US today. Its fiber optic leasing to anchor customers generates about 70% of its total revenue.

Uniti Group pays a $0.15 quarterly dividend and its $0.60 annual dividend now pays 16%. The five-year average dividend yield is 8.86%.

On March 10, Chairman and CEO Kenny Gunderman purchased 225,000 shares of Unity Group stock at an estimated value of $4.37. Total transactions were $983,250. Does it seem logical that Gunderman would buy nearly $1 million worth of stock now if he thought a dividend cut was likely?

With forward annual funds from operations (FFO) of $1.03 and a forward annual dividend rate of $0.60, Uniti Group has an FFO payout ratio of 61%, which generally means that the dividend is pretty safe.

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But Unity Group is not without its risks. Its fourth-quarter results were mixed, as revenue missed analysts' targets, but FFO came in above expectations. Forward guidance for 2023 also came in below analysts' expectations.

All of this may be baked into the stock price at this point. Uniti Group's total return in last four weeks is negative 34.05%. With a recent price of $3.71 and a price/FFO (P/FFO) of only $3.60, Uniti Group could be a tremendous deal for investors with a long-term horizon. At current levels, an investor would buy the stock at a 15% discount to what the CEO just paid.

SL Green Realty Corporation (NYSE: SLG) is an office REIT and New York City's largest landlord of office space with 33.1 million square feet in 61 buildings.

At a recent price of $27.41, shares of SL Green are now well below their 2020 COVID low. One factor weighing on SL Green's performance is its high short position of 15.46%, as investors bet that the work-from-home movement will continue and office occupancy levels will decline.

But many companies are starting to require employees to return to the office, either full or part-time. And New York City subway ridership numbers are on the rise, which could indicate more workers are returning to offices.

SL Green pays a monthly dividend of $0.271 per share. The $3.25 annualized dividend currently yields 11.7%. SL Green cut its monthly dividend by 12.8% from $0.311 in December, and its debt-to-equity ratio of 128 is still quite high, so there's some risk the board of directors could decide to do it again.

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But the FFO payout ratio is only 59.7%, so there's little risk that SL Green won't meet its dividend obligations. The five-year dividend yield average is 5.39%, which is a grossly undervalued stock price. SL Green stock has negative 29.49% total return in last four weeks.

Morgan Stanley recently maintained an Equal Weight position on SL Green, while lowering its target price from $38 to $35. This gives SL Green a potential upside of 27.6%. Between the high dividend yield and potential appreciation, SL Green may be a bargain right now, but it's a long-term play.

Vornado Realty (NYSE: VNO) is another large New York City landlord of offices and retail properties. Like SL Green, Vornado Realty has a high short interest rate of 8.95%.

The quarterly dividend is $0.375, and the annual dividend of $1.50 currently yields 9.4%. The five-year average dividend yield is 5.43%, and the FFO payout ratio is just 55.9%. But Vornado Realty also cut its dividend in January from $0.53 to $0.375 per share, a drop of 29%. The cut reduced its FFO payout ratio to below 79%.

Vornado Realty's fourth-quarter results were also mixed, with FFO of $0.72 beating estimates by $0.05, but revenue of $446.94 million falling below Street estimates of $452.88 million.

On March 3, BMO Capital downgraded Vornado Realty to Underperform from Market Perform and lowered the price target to $18 from $26. On March 9, Morgan Stanley maintained its Underweight position on Vornado Realty, while lowering the price target to $18 from $19. Vornado Realty will have many more lease expirations over the next two years than rival SL Green, and debt levels and expenses will continue to impact its bottom line, analysts said.

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While the FFO payout ratio is at a safe level, recent dividend cuts and warnings about its lease expirations put this office REIT at higher risk of being a yield trap than it bargained for. Vornado Realty's total return over the past four weeks is negative 29.67%, so more adventurous investors may be tempted to make the opposite buy. But Vornado Realty will need to prove its dividend sustainability for a few more quarters before more conservative investors can have faith in this REIT.

Over the past five years, private market real estate investing has outperformed the publicly traded REIT market by nearly 50%. check benzinga real estate offer screener to find the latest passive real estate investments.

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