Rising interest rates and sky-high inflation have caused the real estate market to cool rapidly as mortgage rates hover near decade highs.
The housing market has witnessed a worse-than-expected decline in demand, with pending home sales down 31% year-over-year in September. Commercial real estate is also grappling to regain momentum from the pandemic lows, as remote working has become the new norm.
It comes as no surprise that the majority of publicly traded real estate investment trusts (REITs) are struggling. The S&P United States REIT index is down 26.42% year-to-date, compared to the benchmark S&P 500 index’s 1,815% decline over this period.
As the Federal Reserve gears up to potentially hike the interest rates for the fourth-consecutive time this year next month, earnings of such struggling REITs might take a hit, causing them to reduce their dividend payments.
AGNC Investment Corp. (NASDAQ:AGNC)
AGNC, which specializes in agency mortgage-backed securities (MBS), is one of the largest internally managed residential mortgage REITs in the U.S. However, it’s no secret that residential REITs have been battered over the past few months, causing AGNC’s revenue and earnings to plummet sharply.
AGNC currently pays $1.44 as dividends annually, yielding an impressive 17.6% on the current share price. However, its dividends have declined at a compound annual growth rate (CAGR) of 10.96% over the past three years.
As the company’s losses pile on, it might cut its dividend payout further in the upcoming quarters. AGNC Investment’s comprehensive loss per share amounted to $2.01 for the fiscal third quarter that ended Sept. 30. AGNC’s tangible net book value per common share fell 20.6% quarter-over-quarter to $9.09. Economic return for the quarter stood at negative 17.4%.
Armour Residential REIT Inc. (NYSE:ARR)
The Maryland-based residential REIT is also struggling because of the challenging market conditions. In the fiscal third quarter, Armour Residential’s comprehensive loss came in at $155.7 million, or $1.26 per share. Its book value per common share fell 24.36% sequentially to $5.83.
Armour Residential distributes $0.10 per share as dividends to shareholders on a monthly basis. Currently trading at $5.34, Armour pays $1.20 as dividends annually, yielding 22.47%. But Armour Residential’s dividend payouts have declined at an 18.29% CAGR over the past three years. The company slashed its annual dividend per share from $2.16 in 2019 to $1.20 in 2020, despite the flourishing real estate space during the COVID era. Unsurprisingly, shares of Armour Residential have plunged more than 50% over the past year.
EPR Properties (NYSE:EPR)
EPR has more than $6.6 billion in total real estate investments across the U.S. and Canada. It has significant exposure to theater properties, with more than $2 billion worth of investments across 18 operators.
The REIT pays $3.20 annually as dividends, yielding 8.24% on the current price. However, the multinational REIT’s dividend payouts have declined at a CAGR of 10.54% over the past three years.
The company’s dividends are expected to fall further in the near term, as it navigates the bankruptcy of U.K.-based movie theater operator Cineworld Group plc. EPR stock tumbled nearly 10% intraday following Cineworld’s Chapter 11 bankruptcy filing in August.
EPR Properties’ third-largest tenant is Regal Entertainment Group, a Cineworld subsidiary. Rental revenues accrued from Regal Entertainment account for 13.5% of EPR’s total rental revenues for the fiscal second quarter that ended in June.
Apart from the potential losses resulting from the tenant bankruptcy filing, EPR’s revenue is also expected to decline over the long term, as traditional movie theaters are being increasingly replaced by over-the-top (OTT) entertainment platforms such as Netflix and Amazon Prime video. EPR Properties could potentially cut its dividend payout soon.
Claros Mortgage Trust Inc. (NYSE:CMTG)
An affiliate of Mack Real Estate Credit Strategies L.P., Claros Mortgage specializes in commercial real estate assets across major markets in the U.S. The company went public last November. However, the stock has declined more than 13% since then. Over the past three months alone, the shares of Claros Mortgage lost 14.27%.
Claros Mortgage Trust is scheduled to report its third-quarter results after the market closes on Nov. 9. Analysts expect the company’s revenues to decline 36.1% year-over-year to $65.59 million in the prior quarter, while its funds from operations (FFO) is expected to decline 16.54% year-over-year.
Claros Mortgage Trust pays $1.48 in dividends yearly, yielding 9.19% on its current price. Nonetheless, the REIT only recently began distributing dividends to shareholders, with the first dividend announced on Dec. 30, 2021. However, given its bleak earnings growth prospects, Claros Mortgage might not be able to sustain its dividend payouts, resulting in a dividend cut.
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