In recent years, real estate investment trusts (REITs) have underperformed the broader market by a wide margin, primarily due to elevated interest rates. High interest rates exert significant pressure on REIT share prices for several reasons. Firstly, REITs rely partially on debt to finance their growth, and higher interest rates translate to increased interest expenses, squeezing their profit margins. Secondly, in a high-interest-rate environment, income-seeking investors tend to favor fixed-income securities like Treasury bills, which offer better risk/reward prospects compared to REITs. Consequently, prices have come under pressure, leading to REITs to sell.
A stark illustration of this trend is the Vanguard Real Estate Index Fund ETF Shares (NYSEARCA:VNQ), the largest REIT ETF, which is currently trading at the same levels it did back in 2016. While there is some optimism that the outlook for REITs might improve with anticipated interest rate cuts later this year, some REITs appear overpriced relative to their growth prospects. In this article, I will highlight three such REITs that investors should consider selling before it’s too late. Let’s take a look!
Camden Property Trust (CPT)
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One of the first REITs that came to my mind for composing this list is Camden Property Trust (NYSE:CPT). At the end of Q2, Camden owned 172 properties containing 58,250 apartments, and admittedly, its latest quarterly report was quite decent.
Specifically, Camden posted property revenue of $387.2 million, a modest 0.4% increase compared to Q2 2023. This increase was driven by same-property revenue growth of 2.0%, although slightly lower occupancy rates, which fell from 95.5% to 95.3%, tempered this growth. Also, despite a 2.7% rise in same-property expenses, same-property net operating income (NOI) grew by 1.6%. Also, funds from operations (FFO) totaled $187.7 million, compared to $184.0 million.
However, on a per-share basis, FFO fell from $1.67 to $1.61 due to a higher share count utilized to fund recent property acquisitions. Further, while management revised their fiscal 2024 outlook, expecting FFO per share to land at $6.72 at the midpoint of their outlook, up from $6.69 previously, the stock appears too expensive at its current levels.
Currently trading at about 17.2 times the midpoint of management’s guidance, Camden Property is trading at an almost unjustifiable multiple, even if its FFO/share growth were to accelerate post-rate cuts. Likewise, its dividend yield of 3.5% should be insufficient to satisfy investors even following multiple 50 bps cuts in late 2024 and early 2025, which also signals downside potential and puts CPT among REITs to sell.
Phillips Edison & Company (PECO)
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The second REIT that is probably worth selling at its current levels is Phillips Edison & Company (NYSE:PECO). On the bright side of its investment case, as one of the largest owners of omnichannel grocery-anchored shopping centers, Phillips Edison owns a rather attractive property portfolio. Specifically, at the end of Q2, its portfolio had 286 properties and 20 shopping centers through a joint venture, totaling around 34.8 million square feet leased to quality companies like Chipotle (NYSE:CMG), Starbucks (NASDAQ:SBUX), and Sally Beauty (NYSE:SBH).
The company’s second-quarter results seemed decent, with total revenues rising by 6.2% year-over-year to $161.5 million. Same-store NOI also grew by 1.9% to $105.6 million, and occupancy was strong at 97.5%. The company also posted a Nareit FFO increase of 4.1% to $78.4 million, although Nareit FFO per share decreased slightly to $0.57 due to a higher share count.
Even with these relatively strong metrics in a challenging real estate market, I believe the stock is overpriced at approximately 14.2 times the midpoint of management’s Nareit FFO outlook range of $2.34 to $2.41. With FFO/share likely to keep growing in the low-single digits based on the company’s lease profile, I would value the stock at a P/FFO multiple in the high single digits. Further, like Camden, Phillips Edison’s 3.5% is too soft to thrill any investor into buying the stock today, making it one of the REITs to sell.
Regency Centers (REG)
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The third and final of the REITs to sell is Regency Centers (NYSE:REG). Regency focuses on retail properties and owns or holds partial interests in 481 sites, mainly anchored by major grocery chains. With about 57 million square feet of prime retail space in affluent and high-traffic locations, Regency benefits from strong cash flows generated by top-tier tenants such as TJX (2.8% of annualized rent), Whole Foods (2.7%) and Kroger (2.6%), all of which are stable and unlikely to go out of business any time soon.
The company’s most recent Q2 results were quite strong as well, with revenues growing by 14.1% to $350.5 million, driven by higher leasing and occupancy rates. In fact, Regency’s same-property portfolio was 95.8% leased, up a significant 80 basis points from the prior year period. Nareit FFO also grew by a robust 11.1% year-over-year to $196.4 million, even though FFO per share rose by just three cents to $1.06 due to a higher share count.
Despite Regency’s somewhat strong results and raised outlook, which expects FFO/share to land between $4.21 and $4.25 for FY2024, up from $4.15 to $4.21 previously, I find the stock too expensive at its current levels. Currently trading at about 16.5 times the midpoint of management’s updated FFO/share guidance, investors seem to overestimate Regency’s overall growth prospects. Even consensus FFO/share estimates forecast low-single-digit FFO/share growth over the medium, which can barely justify the stock’s hefty multiple.
On the date of publication, Nikolaos Sismanis did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nikolaos Sismanis is a professional research analyst with five years of experience in the field of equity research and financial modeling. Nikolaos has authored over 1,000 stock-related articles that focus on uncovering deep value opportunities, identifying growth stocks at reasonable valuations, and shining a spotlight on overlooked international equities.
