High-dividend REITs offer haven for nervous money

Posted On Tuesday, 21 October 2008 02:00 Published by
Rate this item
(0 votes)
Shellshocked investors who are seeking refuge from plummeting stock prices might consider certain real estate investment trusts that offer dividend yields in excess of 10% on common stock — and even more on preferred shares

However, fund managers and analysts cautioned, it is crucial for investors to look at the individual REITs' cash flow, debt load, lease expirations and credit rating to ensure that the dividend isn't at risk of being cut.

"There are a lot of good opportunities," said Larry Antonatos, portfolio manager at Chicago-based Heitman LLC.

Equity REITs currently offer dividend yields of 7.3% on average, while mortgage REIT yields average 19.9%, according to the National Association of Real Estate Investment Trusts in Washington.

Certain property sectors offer even bigger yields, with commercial mortgage REITs generating 30.6% and lodging REITs producing 14.7% on average. Yields on individual REITs vary from as low as 3.0% at Public Storage Inc. (PSA) of Glendale, Calif., to as high as 48% at RAIT Financial Trust (RAS) in Philadelphia.

"The reason some of the yields are so high is because there is perceived risk in the marketplace that some of them won't be able to pay the dividends," said Sam Lieber, chief executive of Alpine Woods Capital Investors LLC in Purchase, N.Y.

Indeed, a decision this month by General Growth Properties Inc. to suspend its dividend shook up investors, who nervously began wondering which REIT might be next.

But the Chicago-based mall owner, which has been struggling with $27 billion in debt, the recent departure of its chief financial officer and a stock that has lost more than 90% of its value in the past year, is an anomaly in the REIT world, industry experts said.

General Growth accumulated the debt while on a buying spree during the giddy real estate boom of the past seven years. It has been frantically trying to come up with ways to refinance the $22 billion in debt coming due between now and the end of 2012, Jim Sullivan, a buy-side analyst at Green Street Advisors Inc. of Newport Beach, Calif., said in a research note.

The company has said that it is exploring its options, and there is industry talk that the company is up for sale.

Maguire Properties Inc., a Los Angeles office REIT that faces similar debt issues, ousted its founder and CEO and suspended its dividend in May.

CHERRY-PICKING

But most REITs don't face these debt challenges, experts said.

"The vast majority of real estate dividends are safe" over the next year, said Joe Smith, managing director and portfolio manager at ING Clarion Real Estate Securities LP of Radnor, Pa. Lodging REITs are the exception, he said, as they face risk of deteriorating cash flows from the downturn in business travel.

Fund managers think that apartment, self-storage, and health care REITs offer the safest bets when it comes to dividends, as the three sectors have been weathering the economic turmoil largely unscathed. But their stocks have rallied, causing dividend yields to contract: Yields average 6.5% for apartment REITS, 6.4% for health care REITs, and only 3.8% for self-storage names.

Cherry-picking REITs is key to maximizing safety and yields, industry experts said. Mr. Lieber and Mr. Antonatos see CBL & Associates Properties Inc. of Chattanooga, Tenn., as a good dividend play.

Although the company faces risk from its exposure to sluggish markets in the Southeast and some debt, Mr. Lieber thinks that its dividend, which generates a yield of 22.9%, is safe for at least the next six months. He noted that the company's chief executive and chief operating officer recently purchased shares in CBL, which "is a pretty good sign that they're not worried about anything over the immediate term."

Mr. Lieber and Mr. Smith both see Mack-Cali Realty Corp. (CLI) of Edison, N.J., an office REIT that focuses on the New York metropolitan area, as a good dividend bet with its 10.8% yield.

Other companies with dividend yields north of 9% that are unlikely to cut their dividends include Kite Realty Group Trust (KRG) of Indianapolis, Liberty PropertyTrust (LRY) of Malvern, Pa., Macerich Co. of Santa Monica, Calif., and Weingarten Realty Investors (WRI) of Houston, according to Mr. Smith.

Mr. Lieber even likes a few mortgage REITs, whose stocks have been hit hard by the squeamish sentiment toward anything mortgage-related in the credit markets. He named New York-based Annaly Capital Management Inc. (NLY), which has a yield of 18.6%, and MFA Mortgage Investments Inc. (MFA) of New York, with a yield of 17.2%, as good dividend bets, as both hold securities backed by Fannie Mae of Washington and Freddie Mac of McLean, Va.

Since the government recently bailed out Fannie and Freddie, their bonds are relatively safe, Mr. Lieber said. However, he doesn't recommend commercial-mortgage REITs as a dividend play, even though the average yield in this group is 30.6%.

"If the major banks start selling off their portfolios of non-performing loans, we will see pressure on the commercial mortgage market," Mr. Lieber said.

Several of these REITs, such as Gramercy Capital Corp. and iStar Financial Inc., both of New York, didn't pay third-quarter dividends.

Investors interested in safe bellwether REIT names, such as AMB Property Corp. (AMB) in San Francisco, Kimco Realty Corp. of New Hyde Park, N.Y., Public Storage Inc. of Glendale, Calif., Simon Property Group Inc. of Indianapolis, and Vornado Realty Trust (VNO) in New York, might move up the capital structure to preferred dividends to get higher yields, said Michael Torres, chief executive of Adelante Capital Management LLC in Oakland, Calif.

As an example, AMB's O preferred shares yield 10.9%, while its common shares yield just 7.4%, and Vornado's G preferreds yield 10.62%, while the company's common shares yield 5.8%, he said.


Publisher: Investment News
Source: investmentnews.com

Most Popular

Attacq sees success with high-rise development The Mix

Sep 22, 2021
Giles_Pendleton_Attacq
Waterfall’s latest high-rise residential development, The Mix Waterfall, is approaching…

When can I cancel an Offer to Purchase?

Sep 22, 2021
News_from_Rawson_Property_Group
There’s nothing more exciting (or nerve-wracking) than submitting an Offer to Purchase on…

Serviced office space provider The Business Exchange opens in Cape Town

Sep 21, 2021
TBE_Cape_Town2
Serviced office space provider The Business Exchange (TBE) has extended operations and is…

Interest rates still on hold but scales start tipping towards a hike

Sep 23, 2021
Carmen_Nel_Matrix_Fund_Managers
The SARB Monetary Policy Committee (MPC) decided to keep the repo rate unchanged at 3.5%…

Please publish modules in offcanvas position.