The success and profitability of an investment is never guaranteed. Unfavorable market conditions, over leverage (like high cost or amount of debt held), and oversupply, among other factors, can quickly make what likely started as a promising investment take a turn for the worse.
One reason many investors look to real estate investment trusts (REITs) is for the diversification and quality portfolio of real estate assets, but even REITs are susceptible to the challenges and hardships of an ever-changing real estate market. Knowing when to sell and take a loss, moving on to more profitable investments, can be a challenging but necessary move. Here's why investors should consider selling CBL Properties (NYSE: CBL), Annaly Capital (NYSE: NLY), and Vornado Realty Trust (NYSE: VNO).
Tough times ahead for malls
Retail real estate was hard hit by the global pandemic. CBL Properties, a retail REIT that owns and operates outdoor and indoor shopping centers and malls, was already on shaky ground pre-pandemic, but mandatory closures and decreased in-store shopping forced the company to declare bankruptcy in 2020, and it remains unknown if they will be able to recover.
The company recently released their plan to restructure the company and extinguish over $1.5 billion in debt, mostly by selling assets and using cash on hand, which as of November 2020 was $258.3 million. But selling assets in a down market is never ideal. Operational income is helping offset some losses, but funds from operations (FFO) is down 67.3%, and net operating income (NOI) is down 23.7% year-over-year for the nine months ending September 30th, 2020. Rental occupancy is at 86.8%, and rental collections remain at an average of 69% for April through September 2020. Right now, demand for retail space, particularly malls, is at an all-time low, and there aren't strong signs for a recovery for this sector in the immediate future.
Uncertainty remains for mortgage REITs
Mortgage REITs (mREITs) are by nature a riskier REIT investment than an equity REIT. High leverage, low interest rates, and reliance on continued borrowing means they are more susceptible to market downturns. Right now there are millions of Americans who are struggling to pay their mortgage and are in some form of default or forbearance plan. With many protections expiring at the end of 2020 or in early 2021, mortgage REITs like Annaly Capital that primarily operate with agency-backed mortgages could be in for a startling wake up call.
Right now the company has used the recent surge in homebuying to its advantage to increase liquidity and debt ratios, but book value is down when compared to the same quarter last year, with a lot more volatility and uncertainty lingering in the marketplace. The company recently announced a $1.5 billion share buyback program. After a small dividend cut at the start of 2020, this program could be a way to prepare for a potential downfall in the mortgage industry as protections expire, or a sign of confidence for where the market is headed. I personally think mortgage REITs are unlikely to fare well in the coming year, and considering Annaly's size and exposure in the marketplace, it may be a good time to consider selling shares of this company.
The exodus from cities continues
The recent global pandemic has put housing and location into perspective. Office closures and the ability to work from home has allowed thousands of people to move from high-cost, high-density markets into more affordable suburban or rural communities. This means large cities, including New York City, Seattle, Portland, San Francisco, and Los Angeles, are seeing a record number of people moving from the city.
This doesn't put Vornado Realty Trust, a REIT that owns office and retail space in New York City, in a great position. New York's tough policies regarding COVID-19 safety measures has forced most retailers and developments to remain closed or on pause, resulting in $312 billion decrease in revenues for the company year to date. A few of their tenants, including J.C. Penney (OTC: JCPN.Q) and New York & Company, Inc. have filed bankruptcy resulting in $33.5 million in write-offs in Q3 2020. Additionally, the company has already cut dividends by 19%, and will likely cut dividends again in the future.
The company recently underwent a change in management and announced a program to reduce overhead cost by $35 million in 2021 through reduction of workforce and financial compensations. This will help the company temporarily, but recovery for New York City will be long.
Signs to sell
Low share prices isn't necessarily a good indicator of either the need to sell or that the REIT is a sinking ship. Share values may be down when compared to your original purchase price because of current market conditions -- but long term growth prospects and the financial health of the company are far more accurate indicators to help you determine if and when it's time to cut the cord. Try to take a long-term approach when investing in REITs by identifying REITs that have the potential to grow but also withstand downturns. Not every investment will be a winner. Riding out the storm can sometimes be the best option, but don't be afraid to sell at loss when necessary.