Are real estate stocks heading for a tumble? Increasingly, short sellers are betting that real estate is in for a difficult time in 2024 and beyond. It’s not hard to see why.
There are several reasons for concern for the sector. Higher interest rates have a dramatic negative impact on the value of existing real estate, as it costs more for landlords to service the debts on their properties. In addition, as the yields on alternative investments, such as government bonds, go up, the value of real estate stocks reduces proportionally.
Also, specific economic pressures are hitting the value of particular sub-segments of the real estate market. These are three real estate stocks that have at least 5% of their floats sold short today as traders prepare for the worst.
Vornado Realty Trust (VNO)
Vornado Realty Trust (NYSE:VNO) is one of the nation’s large real estate investment trusts focused on office properties. It has extensive holdings in the New York City metropolitan area.
The switch to remote work and hybrid work models has been challenging to say the least for office owners. Office occupancy rates have rebounded to a certain degree since the depths of the pandemic.
However, the sector remains far short of where it was back in 2019. Almost every week brings fresh news of office properties selling far below prior valuations. Vornado also faces challenges specific to the New York area, such as concerns about the city’s high cost of living and increasing crime rate.
Value investors are hoping that landlords can muddle through and make the most of a challenging situation. The bears, however, believe that between hybrid work models, higher interest rates, and the possibility of an imminent recession that the worst is yet to come.
Innovative Industrial Properties (IIPR)
Innovative Industrial Properties (NYSE:IIPR) is a specialty REIT focused on properties intended for marijuana cultivation.
There is an interesting market opportunity here. That’s because marijuana is still federally illegal in the United States. Therefore, most banks will not lend to marijuana farmers.
Innovative Industrial has been able to buy greenhouses and cultivation facilities and then rent them out to marijuana farmers at high prices, serving in effect as a sort of specialty high-yield financing facility to the marijuana industry.
What’s the issue with this business model? It turns out marijuana has been much less profitable than analysts had expected. Many American marijuana firms have generated substantial losses over time.
This will make it harder and harder for Innovative Industrial’s tenants to stay current on their rent payments. In fact, we’ve already seen some of their tenants fail to pay on time. Secondly, if and when there is progress on the decriminalization of cannabis at a federal level, farmers could get financing from banks directly. This would greatly reduce the need for Innovative Industrial’s services.
Simply put, the company faces both near-term risk if tenants can’t pay rent and longer-term risk that their business model becomes obsolete. For those reasons, short sellers are taking aim at IIPR stock.
Medical Properties Trust (MPW)
Medical Properties Trust (NYSE:MPW) is a hospital REIT. The REIT has run into trouble since the pandemic. COVID-19 significantly disrupted the commercial hospital business model. That’s because hospitals rely on elective surgeries to generate high levels of profitability. By contrast, they earn less money from emergency care such as what was necessary in treating pandemic patients.
Medical Properties Trust has a concentrated revenue base and several of the company’s key tenants, most notably Steward Health Care, have run into financial problems. This has required Medical Properties Trust to in some cases restructure contracts, put more equity into situations, or simply accept lower returns on their hospital buildings.
There have also been investigative reports from the Wall Street Journal that have raised interesting questions about Medical Properties Trust’s business practices. Facing all these challenges, the REIT has had to slash its dividend as it conserves cash to get through this downturn.
The stock is a battleground with bulls hoping for a short squeeze. The bears, by contrast, expect the REIT’s long-term decline to continue. Shares will be volatile in the short run, but over the long term given the poor financial situation, MPW stock is likely to see its shares fall further.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.