How Safe Are REIT Yields?
History provides an answer. Most real estate investment trust sectors seldom skimp on dividends, even during a financial crisis. An excerpt from a new book, Educated REIT Investing, explains why.
EIT yields may be attractive, but they are meaningless if the dividend behind them is not sustainable. Historically, the contractual nature of rental revenue from leases has enabled REITs to pay dividends that have proved to be secure, even during most economic recessions. Equity REITs derive the majority of their income from leases that, depending on their duration and the credit of the tenant, provide REITs with recurring, more bond-like cash flows than most non-REIT companies can offer. Provided a REIT management team does not operate its business with excessive levels of debt (or leverage), the preferred and common dividends of that company should be safe. Many people look at the dividend paid versus the REIT’s FFO (funds from operations) per share.
That said, the 2007‒2008 global financial crisis (GFC) that precipitated the Great Recession of 2008–2009 (Great Recession) served as a grim reminder about economic and market forces that can jeopardize REIT dividends. According to S&P Global Market Intelligence, in 2008–2009 over two-thirds of all REITs cut or suspended their common dividends in response to the GFC in order to conserve cash. Equity REITs produced a dismal total return of negative 37.7% in 2008, before rebounding in 2009 and achieving a positive total return of 28.0%. Despite widespread dividend cuts, in 2008 REITs underperformed the S&P 500 Index by only 73 basis points and then actually outperformed that index by 153 basis points in 2009.
During an economic crisis or “black swan” event, such as the GFC of 2007‒2008 and the dramatic economic disruption associated with combatting the Coronavirus (COVID-19) pandemic of 2020, many REIT boards of directors may elect to cut or temporarily suspend dividend payments to preserve capital. To mitigate the risk of a dividend cut, invest in REITs that operate with lower leverage levels than their peers and/or REITs that invest in more essential property types (such as industrial, office, apartments, or grocery-anchored shopping centers).
The rash of dividend cuts by REITs during the Great Recession was similar to the percent of REITs that slashed their dividends in the wake of the savings and loan crisis of the late 1980s. More recently, the Coronavirus (COVID-19) pandemic in early 2020 precipitated rapid business closures, stay-at-home quarantines, and mandatory social-distancing practices across the U.S. With travel abruptly grinding to a halt, non-essential retail stores and businesses being forced to close for months, and tens of millions of American workers suddenly unemployed, every hotel REIT and 18—or nearly half—of the 37 retail REITs (including free-standing retail) either suspended or dramatically reduced their common dividends to preserve capital.
However, hospitality and retail REITs represent only 25% of publicly traded equity REITs, and those companies that owned more necessity-based real estate, such as industrial property, offices, apartment buildings, self-storage facilities and data centers, generally did not reduce or suspend their dividends. The common thread during each of these three crises, the REITs that maintained or increased their dividends were those that were operating with lower levels of debt and owned commercial property types for which demand remains steady during adverse or uncertain economic conditions.
Educated REIT Investing
With a little help from their friends, two experts on real estate investment trusts, or REITs, have compiled a book aimed at benefitting just about anyone interested in the industry. Stephanie Krewson-Kelly and Glenn Mueller are the authors of Educated REIT Investing, and it’s scheduled for release in early August. Novice REIT investors should have no difficulty digesting the seven chapters in the first part of the book, while investment banks and stock analysts can use the more-technical second part to introduce junior associates to REITs, Krewson-Kelly says. Mueller is a professor in the Franklin L. Burns School of Real Estate and Construction Management in the Daniels College of Business at the University of Denver. Krewson-Kelly teaches there and serves as vice president of investor relations at Corporate Office Properties Trust. As Luckbox went to press, the authors hadn’t settled on a subtitle for their new book but may choose The Ultimate Guide to Understanding and Investing in Real Estate Trusts. Other REIT experts contributed some chapters. The new book expands upon an earlier book called The Intelligent REIT Investor: How to Build Wealth with Real Estate Investment Trusts.
–Excerpted from Educated REIT Investing by Stephanie Krewson-Kelly
and Glenn Mueller.
