Real estate investment trusts (REITs) have become an increasingly popular way to diversify an investment portfolio. Not only do they provide investors access to high-quality real estate but they also offer the potential for growth and high dividend returns. But not every REIT is a worthwhile buy.
Poor management, too much debt, a bad business model, and limited growth opportunities are a few of the common reasons a REIT can tank. And these are issues that Ashford Hospitality Trust (AHT -0.78%) and Office Properties Income Trust (OPI 3.54%) are both facing today. Here's a closer look at why these two REITs should be avoided.
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Ashford Hospitality Trust
Ashford Hospitality Trust owns and operates upscale, luxury hotels, a tough industry to be in right now. After the coronavirus pandemic lockdowns, it applied for the Paycheck Protection Program to help it stay afloat. It received $68 million, making Ashford Hospitality the largest publicly traded recipient of Paycheck Protection funds. A Securities and Exchange Commission investigation began in late 2020, inquiring about Ashford's use of the aid -- which certainly caused a stir among its investors. Fortunately, it was announced that the case was closed with no further action taken at the start of 2022.
Travel and hotel bookings are slowly returning, but Ashford's occupancy and revenue per available room (RevPAR) as of December 2021 weren't very promising. Occupancy for the month of December 2021 was 56% with a RevPAR of $83, an improvement from 2020 but still 13% below pre-pandemic levels. Ashford believes the company will fully recover in 2023 and 2024, but it's not just the pandemic that has spurred less-than-ideal performance. Over the past 10 years, Ashford has produced a -29% return on an annualized basis with share prices falling notably in 2019 and continuing to slide. The shares now are down almost 99% from just five years ago.
The company tried to restore share prices through a 1-for-10 reverse stock split, but like most reverse splits, it wasn't favorable for its current investors. Ashford might make the comeback of the century, but personally, I think it's too risky to take on as an investment and it's one I'm certainly avoiding.
Office Properties Income Trust
The office industry, like hotels and lodging, was hard hit by the pandemic. After a tough two years of employees working from home, many businesses are starting to roll out hybrid work solutions, with some employees making their way back into the office. This helped the majority of office REITs in 2021, but Office Properties has only seen things get worse.
Office Properties specializes in the ownership and leasing of office space in high-density markets across the country. The primary markets in which Office Properties operates, including Washington, D.C., Seattle, Chicago, Boston, and Silicon Valley, among others, have experienced a population outflow as residents moved to suburban and southern areas in search of more affordable housing. Many of these areas are slowly seeing residents return, but strict coronavirus policies have made it difficult for businesses to return to the workplace.
This has pushed Office Properties's occupancy rate down year over year; it now sits at 89.5%. To make matters worse, expenses for the company jumped 11% year over year, while rental income decreased a little less than 2%. This means net operating income (NOI) puts the company at a net loss of $0.17 per share for the year. Funds from operations (FFO), a common metric used to evaluate the profitability of a REIT, also fell noticeably, down more than 9% year over year.
Leasing activity is increasing, with the closing on 2.5 million square feet of space with a rental increase of 6.5% -- so there is hope. But historically Office Property hasn't been a great performer, having a -4% annualized return over the past 10 years, with the share price falling 73% over that same time. When considering the many other worthwhile office REITs today, the risks over Office Properties's future makes this a clear one to avoid.
There is hope, but why take the risk?
These REITs aren't doomed, but they definitely have significant problems. Given their debt positions, declining profitability (or losses), and challenging sectors, the risk simply isn't worth any potential reward. There are dozens of other high-quality real estate stocks in both of these industries and beyond that offer far better returns, growth potential, and safety for investors.