Historically, real estate investment trusts (REITs) have outperformed stocks over the long term. However, not all REITs have what it takes to be successful. Some focus on challenging property sectors and have weak financial profiles, causing significant underperformance. That has certainly been the case for CoreCivic (NYSE: CXW), CBL Properties (NYSE: CBL), and Hersha Hospitality Trust (NYSE: HT), which have generated negative total returns between 45% and 98% since 2013. With that trend unlikely to reverse, investors should steer clear of these REITs.
The REIT structure didn't work
Specialty REIT CoreCivic focuses on government-related real estate solutions. It's currently the nation's largest owner of correctional, detention, and residential reentry facilities in the country.
CoreCivic has been a REIT since 2013. It converted to that structure in hopes that it would enhance its ability to create value for investors. However, the structure hasn't worked for the company. Investors have soured on private prison ownership, which has weighed on the company's valuation. Meanwhile, creditors have pulled back on lending to the sector because of public disdain for companies profiting on incarceration.
Because of that, CoreCivic stopped paying a dividend earlier this year to evaluate whether it made sense to remain a REIT. The company recently announced that it would abandon the structure and become a regular corporation starting next year. As a result, it's not worth the attention of REIT investors. Add that to its financial issues, and investors should avoid this stock altogether.
Struggling to survive
Retail REIT CBL Properties has been pushed to the brink of bankruptcy this year because COVID-19 forced it to temporarily close its mall properties. Because of that, many of its tenants have been unable to generate sales to pay rent. The company only collected 61% of what it billed during the second quarter, with that number falling to 49% in July. On a positive note, it did sign agreements to defer or abate some of this rent, which should bolster its income in future periods, assuming its tenants can afford to make those payments.
The significant decline in rental income has made it challenging for the shopping center owner to manage its debt. It's currently working with lenders and recently stated that it's hoping to reach a "mutually beneficial outcome" that could avoid bankruptcy. However, even if the REIT survives, it could struggle for years, given the overall weakness in the retail sector. Because of that, it's not worth owning, especially since there are retail REITs.
Lots of leverage and burning through cash
Hospitality REITs have gotten crushed this year as COVID-19 significantly impacted travel. That forced most hotel REITs to temporarily close their properties because that was a cheaper option than operating them at a deep loss. While many of these properties have since reopened, Hersha Hospitality Trust still had 15 of its 48 hotels closed at the beginning of August.
Because of that, it's still burning through cash, spending $26.9 million during the second quarter. While that was 13% better than expected, and the burn rate improved from April to June, the hotel REIT can't keep burning through cash because it has a weak financial profile. It only had $23.2 million of cash on hand at the end of the second quarter and had already drawn $95 million on its $250 million credit facility.
Meanwhile, it doesn't have much room to take on debt since it had the highest leverage ratio in the hospitality sector at 8.5 times debt-to-EBITDA as of the end of the first quarter, which was more than double the peer-group average. With its liquidity running dry, and lots of leverage, this hotel REIT is at high risk of having to restructure if market conditions don't bounce back soon.
Financially challenged REITs in troubled property sectors
CoreCivic, CBL Properties, and Hersha Hospitality Trust have been big money losers for REIT investors over the past several years. That trend isn't likely to reverse since CoreCivic is abandoning the sector, CBL Properties is on the brink of bankruptcy, and Hersha Hospitality might be next. Because of that, REIT investors should steer clear of this trio.