Tell Whole Story
Historically, consistent dividends have played a large
role in REITs’ popularity with
investors. Yet, the researchers at
SNL Financial have taken a long
look at the data on REIT dividends, and their conclusions
are somewhat surprising.
Between 1999 and 2008, of the
top 25 U.S. REI Ts based on 10-
year total returns, 15 had a dividend yield that was smaller than
the median for all equity REITs,
6. 37 percent. SNL’s findings come
at a time when capital concerns
have prompted some REITs to cut
their dividends to conserve cash,
and they suggest investors may
not be as punitive as expected with
regard to the cuts.
“This leads us to wonder if dividends are only part of the equation
and if a prudent REIT investor
looking for long-term gains on equity will respect a REIT’s decision
to possibly pay a smaller dividend
yield than the industry median to
maintain a strong balance sheet
and the continued ability to meet
current and future debt obligations,” the researchers wrote.
WHAT ROLE—IF ANY—CAN THE
FEDERAL GOVERNMENT PLAY
IN HELPING TO STABILIZE
THE COMMERCIAL REAL
ESTATE MARKET? ▼
Jack Foster, managing director and head, Franklin
Templeton Real Estate Advisors: Both regulation
and transparency are critical to fix this current crisis.
The SEC was born out of legislation that addressed
transparency. Unfortunately, Wall Street’s form of transparency is not transparent; the weight of data presented
is too difficult to monitor.
To address this “crisis of confidence,” corporate data must be delivered in an open format that is accessible daily and to everyone—no
more hiding “behind the numbers.” Wall Street has consistently demonstrated its ability to dance around regulation with numbers. In contrast, the simple transparency of property data provided by the REIT
community in recent years has reduced overbuilding during this cycle.
Foster is featured in this issue’s Four Quick Questions.
WHAT DO YOU CONSIDER TO
BE THE POTENTIAL PITFALLS
OF REITS OPTING TO PAY A
GREATER PERCENTAGE OF
THEIR DIVIDENDS IN STOCK? ▼
Marty Cohen, co-chairman and co-CEO, Cohen and
Steers: If companies have sufficient cash to pay
their dividends and have no immediate need for that cash,
then they should continue to pay dividends in cash. This is
the covenant that I believe REITs have with investors, in that
they invest for cash returns, as well as capital appreciation.
By paying in stock when it’s not necessary, it sends a signal that
management is not willing to share the company’s profits with its
investors, and it also sends a signal that there may be cash shortage or capital needs that are greater than what the company may
have otherwise signaled. REITs that ignore this are liable to impact
their cost of equity capital.
On the other hand, companies that do need cash and are in danger
of violating debt covenants or other issues should pay dividends in stock
to meet their payout requirements. In addition, those companies should
also right-size their dividends. That means declare dividends in accord
with taxable income and what is the minimum required by the IRS.
For more of Cohen’s view on the current state
of the REIT industry, turn to “Words from the REIT Wise.”