REIT Magazine - May/June 2009

ınthek[now]

Dividends Don’t 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.