HomeMost Popular1 Risky REIT To Avoid And 1 Strong Buy

1 Risky REIT To Avoid And 1 Strong Buy

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Not all REITs are created equal, so it’s important for investors to choose wisely in this diverse sector.

The US alone has over 200 REITs (VNQ) across more than 20 different property sectors, including office, industrial, apartment, retail, hotels, and more.

Today, we’ll examine a risky REIT to avoid and a strong buy that offers promising potential:

SL Green (SLG)

SL Green is an interesting option, with several attractive qualities that draw investors:

  • It owns prime Manhattan properties, a historically safe market with long-term demand and limited new supply growth.
  • SL Green boasts a competent management team focused on shareholder interests.
  • With a monthly 9% dividend yield and a seemingly low payout ratio, the company offers an enticing income opportunity for investors.
  • Due to a recent crash in share price, SL Green’s valuation is now historically low, trading at 7x FFO and a considerable discount to NAV.

However, there is a major concern that makes it a high-risk investment:

The company carries a heavy debt load, surpassing all other office REITs. Its Debt-to-EBITDA ratio is worrying, and it faces numerous significant debt maturities in the coming years as well.

Adding to the uncertainty, prominent REIT investor Jonathan Litt warns of a challenging future for the office sector. He predicts a β€œvery cold winter” of refinancing due to $400 billion of loans coming due, resulting in a weakened office market and higher cap rates.

Finally, SL Green owns a sizable portfolio of older properties that require substantial capital expenditures to maintain their desirability.

Considering these factors, SL Green may become a value trap, leading to disappointing returns. The current discounted valuation could quickly disappear due to expanding cap rates and high leverage.

BSR REIT

To counterbalance the risks associated with SL Green, investors should consider BSR REIT.

BSR focuses on apartment communities in rapidly growing Texan markets, a stark contrast to the uncertain future of New York City offices.

  • While offices face challenges, multifamily properties enjoy strong demand in Texas.
  • Recent comparable sales indicate that BSR’s properties are undervalued, as they trade at a 6.7% implied cap rate compared to peers trading at 4.5%.
  • BSR boasts a solid balance sheet with a conservative 38% LTV and a management team with a vested interest in the company’s success, as evidenced by their share buyback plan.

All these factors make BSR an attractive choice. It offers desirable assets, a healthy balance sheet, and management committed to maximizing shareholder value. With a 40% discount to net asset value, BSR presents a compelling risk-to-reward opportunity.

Closing Note

BSR REIT provides investors with properties in high-demand Texan markets, poised for long-term growth. In contrast, SL Green faces challenges with its NYC office portfolio, substantial capex requirements, and excessive leverage.

Considering both REITs are currently discounted, the superior risk-to-reward ratio lies with BSR. By investing in BSR, investors can gain exposure to a thriving multifamily market and potentially secure significant returns.

Note: This article discusses securities not traded on major U.S. exchanges. Please consider the associated risks.

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