Real estate investment trusts (REITs) are often sought after for their reliable dividend payments. These special stocks are required to pay 90% or more of the taxable income in the form of dividends, meaning dividend cuts aren't something you see frequently.
With that being said, there are certain high-dividend REITs that have a history of slashing their payouts when times get tough. That's something that could happen in the near future for AGNC Investment (AGNC 0.88%) and SL Green Realty (SLG 2.89%).
SLG Dividend Yield data by YCharts
The stocks may seem like an attractive buy at first glance considering both stocks are paying a 13% yield right now. But there are several red flags that indicate a cut could be coming. Here's why.
AGNC Investment is feeling the heat
AGNC Investment Corp is a mortgage REIT (mREIT) that primarily invests in agency-backed mortgage securities. Additionally, the company invests in non-government-sponsored loans like jumbo loans while also earning income for servicing mortgages for third parties.
The last year has been incredibly challenging for mREITs across the board. mREITs rely heavily on borrowing to leverage their money and earn a higher return. The Federal Reserve (the Fed) rose interest rates rapidly last year, in turn, increasing mREITs' cost of capital tremendously and eats into their earnings.
AGNC's diluted net spread per share and dollar roll income has consistently decreased over the last year, going from $1.02 in the first quarter of 2022 to $0.72 by year-end. Additionally, AGNC Investment reported a total net loss per share of $4.22 while paying $1.44 in dividends in 2022.
Nearly all other mortgage REITs have cut their dividends over the last year. Annaly Capital Management was the most recent one to slash payouts in light of the recent banking crisis. There's a chance AGNC Investment will be able to sustain this year without a cut. However, I feel it's unlikely.
Macroeconomic conditions aren't expected to improve suddenly, and history is not on its side. Over the last 10 years, the REIT has cut its payout by 66%. Given its past instability in its dividend payouts, its 13% yield simply isn't worth the risk it carries.
Remote work is crushing SL Green
The office industry was one of the many real estate sectors to get absolutely hammered during the pandemic. Now that the economy has reopened most industries have rebounded nicely. But office space is still struggling.
Remote working was supposed to be a temporary solution for companies. But after employers realized they didn't need as much office space to operate, companies are shedding space rapidly. As of February 2023, office vacancy rates in the United States were at a 20-year high.
Most office REITs have cut their dividend in light of the lingering impacts of the global pandemic. Including Manhattan-focused office REIT SL Green Realty.
The REIT, which owns 61 high-end class A office buildings in the city, cut its dividend at the start of 2023 to help conserve cash and better its financial position in a challenging environment. Its revenue, funds from operations (FFO), and net income have gone down year after year for the last three years. The dividend cut was a smart move. But it may not be enough.
The company has $446 million in debt obligations coming due in 2023 and only $203 million in cash on hand. The REIT has options. It can sell shares to raise capital, restructure the debt with the financing company, or sell assets to pay its debt obligations. But given the weak environment of the office industry, refinancing or selling assets may prove challenging.
The good news is that its dividend is well covered after its latest dividend cut, even with its projected 18% decrease in FFO at the midpoint for the full year 2023. This tells me the company has some time before it's forced to cut its dividend again. Nonetheless, the challenges the office industry is facing and its financial position makes SL Green Realty a stock to steer clear of for the time being.
