REITs - Real Estate Investment Trusts - Info & Discussion

» mdorsey - On NBR tonight

-- posted by mdorsey

» KLR - Re: On NBR tonight

The average REIT yields 7%. But income taxes effectively reduce that to 4.4% for a wealthy investor. Cutting the dividend tax would be effectively hike REIT yields by 50% or so for top-bracket shareholders.

Ah, but here's the rub: Bush's proposal leaves REITs out. REITs, after all, don't pay corporate income taxes. That's the whole point of being a REIT. So there's no "double-taxation." And under the Bush plan, there almost certainly won't be any tax cut for REIT dividends.

Says Stuart Seeley, head REIT analyst at UBS Warburg and a master of understatement: Bush's proposal "may be a negative for the REITs." David Shulman, who runs real estate research at Lehman Brothers, puts it more plainly: Even a watered-down version of Bush's plan "looks likely to the detriment of REITs. It is a big deal." Shulman believes many REITs could ultimately choose to lower their dividends and convert to ordinary taxable corporations.

The thinking is simple. REITs aren't getting an effective 50% hike in dividend yields. But other stocks would. So any investor who'd been holding REITs primarily for the dividend income would bail out.

And why not? Unless an investor is particularly religious about self-storage centers, why own Public Storage (nyse: PSA - news - people ), yielding 5.4%? After taxes, that's just 3.2% to wealthy investors. Much better to own Philip Morris (nyse: MO - news - people ), J.P. Morgan (nyse: JPM - news - people ) or General Motors (nyse: GM - news - people ), yielding 5.5% to 6.5%.

Why own any REITs at all? Even lower yielding blue-chip stocks like Boeing (nyse: BA - news - people ), yielding 2%, or General Electric (nyse: GE - news - people ), yielding 2.5%, look more attractive.

-- posted by KLR

» gheuer717 - Re: Tax Free dividends

The Merrill Lynch REIT analyst recently (1/7)stated; that his "sources" indicated that REIT dividends would not be tax free because they already enjoy the tax free corporate advantage; he added that consequently REITS may be 5-9% overvalued, depending on whether the final bill passage results in a 50 or 100% tax free status for dividends to individuals.

-- posted by gheuer717

» Jen_ - REITs - Ripe for a Fall?

In a Fix

A weak economy could jeopardize some REITs' dividend coverage

By CHRISTOPHER C. WILLIAMS

PHILLIP COOK'S TWO-STORY office building occupies a sweet spot of real estate in Torrance, Calif. But his portfolio, heavily invested in real-estate investment trusts, sits on a fault line.

Sure, REITs have run circles around the Standard & Poor's 500 stock index since 2000, producing an average annual total return of 14.7%, compared with the S&P's average yearly decline of 14.3%. But Cook, 55, fears that REITs are now ripe for a fall, as a weak economy curbs their ability to boost dividends. He's been paring back, and urging clients of Cook & Associates, his financial-planning firm, to do the same.

Indeed, a shaky economy is rattling many REIT investors, who had been drawn to the sector because of its lush dividends. REIT yields averaged about 7% in the past three years, compared with the S&P's paltry 1.43%.

In November, however, when Post Properties, a major apartment developer, slashed its payout to $1.80 per share from $3.12, a chill ran through the market.

Since then, a succession of grim economic reports has raised concerns about the earnings power, and dividend safety, of some other real-estate investment trusts -- particularly in the moribund office and apartment markets.

REITs are required by law to pay out to shareholders at least 90% of their taxable earnings. But some REITs might have trouble meeting their obligations if the economy worsens, as the cash flow available to cover dividends is running dangerously low.

So says Steve Sakwa, senior REIT analyst at Merrill Lynch, who calculates dividend security by dividing adjusted funds from operations, or AFFO -- an industry proxy for free cash flow -- by dividend payments.

The average dividend-coverage ratio, or DCR, for the 48 REITs that Sakwa follows currently stands at 145%, meaning that they must generate $1.45 of cash for every dollar paid out. But 21 of the 48 have ratios of 110% or less, based on his projections for 2003 operating earnings.

"A coverage ratio below 110% leaves little room for error, should economic growth turn out to be lower than expected,'' Sakwa says. In tandem with Merrill's downbeat economic forecast, the firm expects real-estate investment trusts' earnings, excluding special charges, to fall by 2.6% this year, which would be the industry's first decline in more than 10 years. Industry earnings last year rose by 2%.

Among the REITs with the lowest dividend-coverage ratios are Chateau Communities, Camden Property Trust, Reckson Associates Realty and Crescent Real Estate Equities, which cut its annual dividend to $1.50 from $2.20 in October 2001, and has the group's lowest coverage ratio. Sakwa isn't necessarily predicting dividend cuts for the bottom-dwellers, but says these REITs are "unlikely to see dividend growth in the short term."

The epicenter of risk lies in the apartment and office sectors, both of which have been slammed by high vacancies and shrinking rents. Malls and shopping centers are faring better, however -- which bodes well for investors in retail REITs.

Most major retail and mall developers have ample "FAD," or funds available for dividends, explains Thomas Trotman, manager of the Delaware REIT fund, based in Philadelphia. "Only in office and apartment names are we starting to see coverage slip below one times cash flow," he says.

Trotman, whose fund rose 4% last year, puts Highwoods Properties, a Raleigh, N.C., office REIT, on its at-risk list. The REIT has indicated that funds from operations could fall $10 million to $20 million short of its $141 million dividend obligation this year. Highwood has said it will fund the shortfall by selling assets, but won't make any promises for future years.

Craig Leupold, an analyst with Green Street Advisors, a real-estate research firm in Newport Beach, Calif., says only three of the 13 apartment REITs he follows have enough operating cash flow to cover their dividends this year. Among those most at risk are Gables Residential, Amli Residential Properties and Associated Estates, which is covering only 41% of its payout.

Marvin Banks, chief financial officer of Gables, a Boca Raton, Fla., operator of multi-family apartment communities, says management is "extremely confident in our ability to pay the dividend" this year and next. Although analysts estimate that Gables will fall 21 cents short of its $2.41 dividend, Banks says the company can cover the payout with proceeds from asset sales.

Allan Sweet, president of Chicago-based Amli, says his company has sufficient cash flow to cover the dividend in 2003. Associated Estates didn't return calls seeking comment.

In Sickness and in Wealth

The ailing health-care business is weighing on some health-care property REITs, too. Among them: Health Care Property Investors and Nationwide Health Properties, both of Newport Beach, Calif. "They are beginning to see significant erosion in coverage," Trotman says.

Health Care Property reported an adjusted cash flow of $3.25 per share last year -- a penny short of its annual dividend of $3.26. Nationwide's funds from operations also slipped below its $1.84 dividend. Officials from neither company were available for comment.

<img src="/files/mysites/jen14/reit index 00-03.gif" width=238 height=238 align="left"> To be sure, REITs are still the address of choice for many investors seeking current income. Fifty-seven have raised their payouts since the third quarter of 2002, while only seven have lowered their dividends, according to National Association of Real Estate Investment Trusts.

Even if REITs were to cut their dividends by a third, as a group they would offer better yields than most other investments.

And most would rather sell assets or tap credit lines than reduce their payouts. Archstone-Smith Trust, for instance, an Englewood, Colo.-based REIT with a dividend-coverage ratio of 95%, could lean on its $400 million credit line, or sell assets, to plug an expected $20 million dividend shortfall this year, says Merrill's Sakwa.

Legendary real-estate developer Sam Zell, who recently made a bullish presentation at a REIT symposium in New York, thinks the trusts will outperform "all our competition" for the next five years. Zell tells Barron's that he doesn't expect dividend cuts to be "a major problem" for the industry.

Nonetheless, investors should tread carefully. Sakwa notes that REITs in general are trading at a slight premium to his estimates of net asset values. The analyst recently lowered his ratings on five -- Forest City Enterprises (technically, a real-estate operating company), Heritage Property, General Growth, Pan Pacific and Manufactured Home Communities -- citing their rich valuations. "Given the uncertainty in the economy, we see less than 10% total return over the next 12 months," he says.

Sakwa is most concerned about Reckson, with a dividend-coverage ratio of 87%, and Crescent, with a DCR of 85%. Last month Reckson fell about two points, to $17.88, after Merrill downgraded the office REIT to Neutral from Buy. The shares have since rebounded to $19.56, but Reckson remains weighed down by high capital expenses, and could generate cash flow of $1.51 a share, below the expected $1.70 dividend payout.

"A dividend cut is ... probably warranted," said Green Street analyst John Lutzius in a recent report.

That's not in the offing this year, counters Scott Rechler, the REIT's co-CEO. "We have the balance-sheet flexibility and assets to fund the dividend" in the short term, he says.

And in the long term? "We'll address it then," he adds.

Crescent officials weren't not available for comment. But Chief Executive Officer John Goff recently told the Wall Street Journal that the Fort Worth, Texas, office REIT has "substantial cash flow from land development" to honor its dividend.

Heading Sakwa's recommended list are REITs that combine sterling dividend-coverage ratios with strong balance sheets, high credit quality and long-term leases. These include Rouse Company, in Columbia, Md., and Federal Realty Investment Trust, in Rockville, Md., which has increased its dividend for 35 straight years. Sakwa touts the REITs' "high-quality portfolios."

Real-estate investment trusts still offer shelter for many investors. And both are likely to prosper as the economy recovers. But in a weak economy, there are only so many assets a developer can sell, and only so much money that a REIT can borrow, before the demands of business trump the desire to be generous to shareholders.

Subscribe to WSJ & Barron's online @ http://www.wsj.com

.....Jen

-- posted by Jen_

» Kirk - REIT vs S&P500 - 1970 to 2004

When interest rates start to go up again, it would be a good time for the REIT/S&P500 ratio to change

Year-to-date:
 
  Date       Kirk    S&P500   Delta
2003 YTD    +74.3%   22.5%    51.8%  as of 12/07/2003 
 

Total Return:
                                 Kirk   S&P500+  NASDAQ 
4.75+ Yrs 12/31/98 to 12/07/03  167.3%  ( 7.5%) (11.6%)
Annualized Annual Return         22.0%  ( 1.6%) ( 2.5%)  
 
  
9/30/98 Inception Value:   $100,000
9/30/03 5 yrs later value: $345,395 up 245.4%
S&P500 between 9/30/98 and 9/30/03: up   4.6%
With dividends reinvested. All Numbers unaudited. 
Click for a free issue of my newsletter 
Suitable for the aggressive growth part of your 
diversified investment portfolio. 

-- posted by Kirk

» bob90245 - Where to put REITs question

Thanks in advance.

Bob

-- posted by bob90245

» Kirk - Re: Where to put REITs question

Your plan makes sense to me. I have a variable annuity at Vanguard I bought in 1992 or 1993 that I use for foreign funds so they can compound without taxes until I retire. I think an annuity at Vanguard makes sense IFF (if and only if) you need to add fixed income to your asset allocation and it can only be done with taxable money. I think you do much better for equities in index funds since you pay the long term capital gains rate when you eventually take the money vs. normal income tax rate used for annuities and IRAs.

-- posted by Kirk

» Kirk - REIT Index: 1970 – 2004 Bull Market Chart.

<img src=http://www.chartoftheday.com/20040225.gif width=454 height=340>
http://www.chartoftheday.com

         PERIOD                Kirk  Wilshire5000  Delta
1 Year Return to 12-31-2003    +77%     +31%         46%  
3 Year Return to 12-31-2003    +25%      -7%         32%  
5 Year Return to 12-31-2003   +171%      +2%        169%  

 

Total Return:
                                  Kirk   S&P500+  NASDAQ 
5 Yrs 12/31/98 through 12/31/03  171.0%  ( 3.0%)  ( 8.6%)
Annualized Annual Return          22.1%  ( 0.6%)  ( 1.8%)
 
Click for a free issue of my newsletter 
Suitable for the aggressive growth part of your
  diversified investment portfolio. 

Bob Brinker, Bob Brinker, Bob Brinker, Bob Brinker, Bob Brinker, Bob Brinker, Bob Brinker, Bob Brinker

-- posted by Kirk

» bob90245 - Re: Re: Where to put REITs question

Thanks for the reply, Kirk. And let me follow up on this.

I called the number for Vanguard's Annuity. And spoke to a very helpful phone rep. He made great pains to give me both the pluses and minuses of their Annuity program along the lines of tax considerations, etc. I told him my reasoning to shelter dividend income in order to reap greater long-term compound growth.

Then after the call, I thought about it some more. And I remembered seeing the historical growth for both dividends and capital appreciation for the REIT index fund. If my memory serves, half the total return is from dividends and the other half from capital appreciation. So I figured, it may be a toss-up because on the one hand, the dividends will benefit from tax-sheltering. But on the other hand, the appreciation of NAV does not need sheltering and in fact, will be taxed at higher ordinary rates when funds are withdrawn from the annuity (as opposed to lower capital gains rates from a regular account).

So, in the end, I decided to buy the REIT index in a regular taxable account.

Bob

-- posted by bob90245

» Normxxx - Re: Re: Re: Where to put REITs question

Steer clear of annuities! The costs almost always overwhelm any tax advantages and seriously add to your pain if the market goes nowhere to down.

-- posted by Normxxx