Real estate was one of the worst-performing sectors in 2022, as rising interest rates and low demand pummeled both residential and commercial real estate investment trusts (REITs). The Real Estate Select Sector SPDR ETF has declined by 27.8% year to date. In comparison, the benchmark S&P 500 index is down only 19.7% in 2022.
The growing concerns regarding an impending recession along with the Federal Reserve’s reiterated hawkish stance will likely keep the real estate sector under pressure in the near term, further raising concerns regarding the performance of REITs.
Though many REITs have recovered slightly over the past couple of months, the majority of them are still in the red.
“Despite the inflation protection typically associated with the real estate sector, REITs underperformed the broader equities market and have overcorrected compared to private real estate,” said Laurel Durkay, head of Global Listed Real Assets at Morgan Stanley.
While the sector’s underperformance might scare off many investors, it has created stellar investment opportunities, as several promising REITs are trading at deep discounts. But it’s important to look at a REIT’s earnings growth potential and market opportunities to avoid a value trap.
Some of the worst-performing REITs this year are as follows:
Broadmark Realty Capital
Shares of Seattle-based specialty real estate finance company Broadmark Realty Capital Inc. (NYSE: BRMK) have lost 61.4% year to date. The REIT’s poor financials along with the volatile real estate market have resulted in a massive selloff this year. Now trading below $5, the penny stock is one of the worst-performing REITs in 2022.
Broadmark Realty Capital’s growth prospects don’t seem too promising for the near term. In the fiscal fourth quarter that ends Dec. 31, analysts expect the REIT’s revenue to amount to $26.96 million. This is 13.9% below the revenue generated in the fourth quarter of 2021. The consensus earnings per share (EPS) estimate of $0.13 for the ongoing quarter indicates a 25.6% decline year over year.
Broadmark Realty Capital pays $0.77 annually in dividends, translating to a 22.68% yield. Broadmark Realty Capital began distributing dividends in 2019 and has raised its dividend payouts by 85.8% since then. But it slashed its dividend per share amount by 8.33% from $0.84 last year to $0.77 in 2022.
Medical Properties Trust
Medical Properties Trust Inc. (NYSE: MPW) is a prominent healthcare REIT that owns and operates 434 properties in 10 countries across North America, Australia and Europe. It is the second-largest owner of hospital beds in the U.S. Because of the crushing impact of the pandemic on the global healthcare system shaking investor confidence, shares of Medical Properties Trust have lost 52.4% so far this year.
But the healthcare REIT’s long-term performance paints a different picture. Since its initial public offering (IPO) in 2005, Medical Properties Trust has returned 10.8% to shareholders (as of July 29). In comparison, the Dow Jones U.S. Real Estate Health Care index’s total returns stand at 8.5%, while the Dow Jones Equity All REIT has surged 7.8%.
The REIT also has an impressive dividend-paying track record. It pays $1.16 per share in dividends annually, yielding 10.5%. Medical Properties Trust’s four-year average dividend yield is 5.89%. In addition, the healthcare REIT has hiked its annual dividend payouts consecutively since 2013. Over the past three years, the REIT’s dividends have risen at a 4.4% compound annual growth rate (CAGR).
Analysts maintain a consensus price target of $16.44 on the stock, indicating a 46.9% potential upside.
Industrial Logistics Properties
Industrial Logistics Properties Trust (NASDAQ: ILPT) owns and operates 413 industrial and logistics properties across the U.S. The REIT’s shares fell by over 86% year to date. But the stock gained 2.9% over the past five days because of the latest relief rally in the real estate sector.
Though several analysts covering Industrial Logistics Properties have a Hold rating on the stock, they expect the share price to go up in the near term. RBC Capital analyst Michael Carroll has a price target of $6, indicating a 78% potential upside.
Industrial Logistics Properties pays $0.04 annually in dividends, yielding 1.31% on the current stock price. The REIT nearly halved its dividend payout in July. Following this announcement, shares of Industrial Logistics Properties fell by over 30%.
This was done to improve its liquidity while completing the long-term financing plan for its acquisition of Monmouth Real Estate Investment Corp. as stated by the REIT’s management in a press release. Industrial Logistics Properties’ management expects the company’s dividend payouts to be restored to previous levels by next year.
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