There's no doubt that 2019 was the year of the REIT.
Three Federal Reserve rate cuts have left interest rates incredibly low, between 1.5% and 1.75% as we head toward 2020.
Any REIT with stable cash flow was bought and bought hard in 2019.
Who wouldn't buy a REIT yielding 5% or more with rates so low?
Honestly, I'm surprised REITs didn't explode even higher than they did this year. Yields compared to the rest of the market were that attractive.
Like tech stocks in the last 1990s, REIT investors could essentially blindly throw a dart and succeed in 2019.
Things won't be as easy in 2020, which is why investors will want to use caution when picking REITs next year.
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Just because a REIT has a huge dividend is not a reason to buy. That's always the case, but it will be especially true next year.
Those big dividends may distract from underlying issues that could erode share value.
After all, what good is a large dividend if the share price drops?
Take for example CBL & Associates Properties Inc. (NYSE: CBL). This mall-based retail REIT traded for more than $25 per share five years ago.
Today, CBL trades near $1 per share and is likely headed to $0. No one wants a dud like that in their portfolio to start the new year.
While there may not be a CBL landmine in the market today, there is risk as we head into 2020.
In a market chock full of high-yielding alternatives, the best advice is to buy with as little risk as possible and avoid the REITs that bring the most danger.
Here are three popular REITs I would avoid now...
REITs to Avoid in 2020, No. 3
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One of the big winners in 2019 was Global Net Lease Inc. (NYSE: GNL). This sale leaseback REIT saw its shares increase by over 20% in the last 12 months.
Despite those gains, Global is paying a dividend of more than 10% today.
The problem for Global Net is that much of its portfolio is in the office sector. Should Global lose a tenant, it is difficult to replace them.
Fewer tenants mean less cash flow to be distributed to shareholders.
Add in the fact, the company is highly levered, and investors have the added worry about rising rates.
There are better opportunities out there than Global Net.
REITs to Avoid in 2020, No. 2
Looking for the next CBL?
My bet is on Macerich Co. (NYSE: MAC). While this regional mall REIT has lost almost half its value in 2019, there is still $3.7 billion of value to destroy.
Investors looking for yield will be attracted to Macerich's 11% dividend yield, but caution is warranted.
The retail sector remains in a death struggle. Many companies are still failing, leaving vast chunks of mall space empty.
Earnings at Macerich are falling.
Analysts expect the company to make $0.45 per share in 2019 dropping to $0.35 per share in 2020.
That's not a huge drop, but again, it signifies the risk of owning Macerich today.
If 2020 brings more retail bankruptcies, investors could lose much more than the big dividend Macerich pays today.
REITs to Avoid in 2020, No. 1
I'm a big believer in sector rotation. What does well one year may not do so well the next.
It's no secret that apartment REITs were big winners in 2019. Strong economic growth in the United States with low interest rates resulted in huge demand for apartments.
Rents are higher, and vacancy is low.
No wonder a stock like Independence Realty Trust Inc. (NYSE: IRT) is up some 50% in 2019.
Does a banner year in 2019 continue in 2020?
I wouldn't stick around to find out.
Analysts are expecting a big drop in earnings, with the company estimated to make $0.31 per share in 2019 and only $0.20 per share in 2020.
This despite nearly perfect operating conditions in the rental market.
Any blips in those perfect conditions, and investors will be left out in the cold.
The huge run-up in share price has dropped the dividend yield to 5%.
That's not nearly enough to compensate for the potential drop in share price in 2020.
I would avoid Independence entirely. The valuation is simply too rich today.
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