Indeed, real estate investment trusts have posted total returns of about 6.5% on average so far this year, with the dividend yield, which currently averages 5.3%, accounting for most of the gains, according to the National Association of Real Estate Investment Trusts Inc. of Washington. These are attractive yields at a time when the Standard & Poor's 500 stock index is down 6.4% and 10-year Treasuries are yielding just 3.8%.
Certain segments of the REIT universe offer significantly higher yields, such as lodging REITs, whose dividend yield averages 6.8%, and mortgage REITs, whose yield averages a whopping 13.9%. The dividend yield has helped lure investors back into REITs after the group fell off investors' radar screens last year.
"You saw the REITs get hit pretty bad in 2007 in the latter part of the year, and so part of [the rally] is a bounce-back," said analyst Tony Paolone of New York-based JPMorgan Chase & Co. Last year, REITs delivered returns of -17.8%, according to Nareit. Mr. Paolone said a rebound from last year's lows, short covering and the dividend yield have helped the group rally back this year.
"The yield has become more attractive as the Fed has pushed down short-term rates," said Michael Torres, chief executive of Adelante Capital Management LLC, an Oakland, Calif., boutique investment manager that invests in REITs. "You get the protection of the lease structure in real estate companies, where the big worry [in the broader market] is a deceleration of earnings and equity."
However, market experts caution investors to do their homework on the individual REITs in light of the volatile economic environment and not to jump blindly into the REITs that offer the biggest yields.
"I think you have to be very careful looking at just high-yield stocks," Mr. Torres said. It's important for investors to scrutinize a REIT to make sure it's generating sufficient capital to cover its dividend, he said. "You want some protection in a slowdown so that the company doesn't necessarily have to reduce the dividend in 2009 or 2010."
In general, REITs offering the biggest dividend yields have outperformed their peers and the broader market in 2008.
REIT PACK LEADERS
Mortgage REITs lead the pack, with Deerfield Capital Corp. (DFR) offering a 154.1% dividend yield. This is followed by Hanover Capital Mortgage Holdings Inc. (HCM) of Edison, N.J., at 112.5%; Thornburg Mortgage Inc. (TMA) of Santa Fe, N.M., at 76.3%; American Mortgage Acceptance Corp. (AMC) of Kings Beach, Calif., at 68.7%; RAIT Financial Trust of Philadelphia at 27.1%; Alesco Financial Inc. (AFN) of Philadelphia at 32%; and Crystal River Capital Inc. (CRZ) of New York at 31.1%.
However, many of the mortgage REITs offering lofty dividend yields also face hefty risks associated with the credit crunch. Deerfield Capital of Rosemont, Ill., for example, was forced to sell significant chunks of its residential mortgage-backed securities at fire sale prices to boost its liquidity and has lost more than 90% of its value from its 2005 initial public offering price of $16. Its shares recently traded at under a buck.
"In most instances, there's a reason the yield is that high, and that means the risk level is pretty high as well," Mr. Paolone said. "If it's trading with that kind of yield, chances are, it's not sustainable."
On the equity REIT side, the top performers are lodging, health care and mixed office/industrial REITs, where the dividend yield averages 6.8%, 5.2% and 7.2%, respectively.
Feldman Mall Properties Inc. of Phoenix (FMP) takes the lead with a 42.5% dividend. Other equity names with yields above 10% include Sun Communities (SUI), BRT Realty Trust, Glimcher Realty Trust (GRT), FelCor Lodging Trust Inc. (FCH), HRPT Properties Trust (HRP), Getty Realty Corp. (GTY), Ashford Hospitality Trust (AHT) and MHI Hospitality Corp. (MDH).
"But you can't just screen for yield and pick stocks that way," Mr. Paolone warned. "If you bought REIT stocks historically based on yield alone, you've probably underperformed." Mr. Paolone said it's crucial that investors assess a REIT's growth prospects and ability to generate the cash flow to cover the dividend before snapping up a company for its yield.
"For those that are focused on income, you can find good companies with safe, growing dividends that are yielding 6-plus percent," which is attractive to those looking for higher yields than 10-year Treasuries, he said. Mr. Paolone's top picks based on dividend yield and growth prospects include mall REIT CBL & Associates Properties Inc. (CBL) of Chattanooga, Tenn., with a 9% yield; movie theater REIT Entertainment Properties Trust (EPR) of Kansas City, Mo., at 6.5%; and Developers Diversified Realty Corp. of Beachwood, Ohio, at 6.3%.
E-mail Janet Morrissey at jmorrissey@investmentnews.com.
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