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Avoid These 3 REITs at All Costs

Jul 03, 2020 by Matthew DiLallo

Real estate investment trusts (REITs) can be a great way for investors to grow their wealth. These commercial real estate owners tend to generate steady cash flow as tenants pay rent, giving them the funds to pay dividends and acquire more properties.

However, not all REITs do a good job of creating value for their investors. Three that have struggled mightily are The GEO Group Inc. (NYSE: GEO), CorEnergy Infrastructure Trust (NYSE: CORR), and Washington Prime Group (NYSE: WPG). Because of that, REIT investors should avoid this trio at all costs.

Not a very secure dividend

GEO Group is a specialty REIT focused on operating prisons, processing centers, and community reentry facilities in the U.S., U.K., Australia, and South Africa. The company gets 61% of its revenue from facilities it owns or leases, 25% from those it manages, and 14% from nonresidential facilities and other properties and services.

While these facilities tend to generate stable revenue via secured contracts with government agencies, there's a stigma attached to the private ownership and operation of prisons. A growing number of citizens, lawmakers, and investors don't think private prison operators should profit from incarceration. Because of that, an increasing number of banks won't lend money to these companies, while many investment funds won't own them. These issues have impacted the valuation of prison REITs like GEO Group, which has seen its stock slump 44% over the past year.

On top of that, the REIT's financial metrics are a concern. It's on track to pay out nearly 84% of its funds from operations (FFO) this year to support its dividend. That's one reason why its yield has risen to a concerning 16%. The company also has a sizable amount of debt. Given all its issues, GEO Group isn't worth a spot in a REIT investor's portfolio.

Terrible tenants in a tough industry

Infrastructure REIT CorEnergy Infrastructure Trust is having a tough year. Crashing crude oil prices forced one of its largest tenants to shut all its offshore oil wells. Meanwhile, another major tenant filed for bankruptcy for the second time in the last few years. Because of that, neither one has been paying rent over the past few months. Those issues forced CorEnergy to slash its dividend by 93%. They also put a lot of pressure on the REIT's stock price, which has plummeted nearly 80% this year.

One of CorEnergy's biggest problems is tenant concentration. It only owns four assets, with the largest two leased to those financially challenged tenants. It has since offloaded one of them back to the tenant going through bankruptcy at a fraction of the value it originally paid for the asset. It hopes to eventually replace that lost income by acquiring additional infrastructure leased to stronger tenants. However, it has been trying to make acquisitions for years without success, leaving little confidence that it will close a transaction. Given these issues, REIT investors should steer clear of CorEnergy Infrastructure Trust.

On the brink

Retail REIT Washington Prime Group is also having a very tough year. The mall owner's stock has cratered 75% in 2020, largely due to the impact the COVID-19 outbreak has had on the sector. The company had to close its enclosed mall properties, while many tenants at its open-air facilities weren't allowed to stay open because they weren't an essential business. Because of this, the company only collected 30% of its base rent in April and anticipates receiving about 45% of the rent it will bill during the second quarter.

With so many of its tenants not paying rent, Washington Prime Group is under some significant financial strain. It suspended its dividend and drew about $120 million on its credit facility to boost its cash position. While the company believes it can self-fund its operations despite significantly reduced rental collections during the second and third quarters, there's a growing concern that it might not remain in compliance with its financial covenants. If its creditors don't wave or modify these covenants, the company might not continue as a going concern, suggesting that a bankruptcy restructuring is a possibility. Given that risk, REIT investors should avoid Washington Prime Group like the plague.

Really risky REITs

The main draw of REITs is that most provide investors with a steady income stream. However, that's not the case with this trio. Washington Prime and CorEnergy already cut their payouts, while a similar move seems likely at GEO Group. Add that to their other issues, which could put additional pressure on their share prices, and investors shouldn't come anywhere near these REITs.

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Matthew DiLallo owns shares of CorEnergy Infrastructure Trust. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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