Rich.............just ran across this ............
Office REITs Are Most At Risk Of Div Cuts In Next Year
12-03-03 12:09 PM EST
NEW YORK (Dow Jones)--Real estate investment trust investors and analysts are abuzz these days, and their conversations have them sounding like Sir Laurence Olivier in the 1970s paranoid thriller "Marathon Man."
Is it safe?
The "it" in this case is the dividend, which turns out not to be safe at a number of REITs. And many believe more dividend payouts will be slashed over the next year or two, particularly among office REITs.
Indeed, falling rents and occupancies continue to plague the real-estate world as job growth and the economic recovery have been slower than expected. The weaker rents and occupancies have led to lower cash flows, causing some REITs to struggle to pay their dividends.
To date, apartment REITs have been hit hardest as a flurry of companies, such as Apartment Investment & Management Co.(NYSE:AIV) (AIV), Post Properties Inc.(NYSE:PPS) (PPS), and Summit Properties Inc.(NYSE:SMT) (SMT) have all trimmed their dividends, analysts noted. However, many now believe this sector has bottomed, and that office REITs are most vulnerable now.
Highwood Properties Inc. (HIW), a Raleigh, N.C., office REIT, slashed its dividend by 27% earlier this year. And many analysts and investors expect it won't be the last one.
Some companies "have not earned their dividend by a long shot for quite some time," said Bob Steers, co-portfolio manager at Cohen & Steers Capital Management Inc. But many have been able to offset the cash-flow shortfall by selling off noncore properties or by borrowing money.
But for how long?
Steers admits his firm sold off shares in REITs it considered most vulnerable to a dividend cut, such as Apartment Investment & Management Co.(NYSE:AIV) and Post Properties.
The fund manager names Crescent Real Estate Equities Co.(NYSE:CEI) (CEI), Reckson Associates Realty Corp.(NYSE:RA) (RA), and Arden Realty Group Inc.(NYSE:ARI) (ARI) as among the REITs most at risk of dividend cuts over the next year.
Still, Steers said he also considers valuation and company fundamentals when making investment decisions. Although Arden has a high payout ratio - which means its cash flow falls short of the amount needed to cover its dividend - its valuation is low and its growth prospects are high, making it attractive, he said. Arden focuses on the southern California market, where occupancies and cash flow are on the upswing, he noted.
Deutsche Bank analyst Louis Taylor names office REITs - Arden, Reckson and Equity Office Properties Trust(NYSE:EOP) (EOP) - as well as industrial REIT, First Industrial Realty Trust Inc.(NYSE:FR) (FR), as the ones most at risk of a dividend cut.
During a conference call last month, Equity Office Chief Executive Richard Kincaid indicated that his company would likely face a cash-flow shortfall of $ 100 million to $150 million at year's end. However, he said the company will have enough liquidity from property sales to pay its dividend.
"(Equity Office Chairman) Sam Zell has said he considers the dividend to be a fixed cost" and has vowed to continue funding it through other avenues, said Taylor.
Still, to reflect the dividend risk, Taylor rates Equity Office, Arden and Reckson at hold, and First Industrial at sell. Taylor doesn't hold shares in these companies, but his firm has an investment-banking relationship with First Industrial and Reckson.
Cobblestone Research LLC analyst Paul Adornato names Great Lakes REIT (GL), Glenborough Realty Trust (GLB), Arden, Kilroy Realty Corp.(NYSE:KRC) (KRC), Koger Equity Inc.(NYSE:KE) (KE) and Reckson as those most at risk of a dividend cut.
-By Janet Morrissey, Dow Jones Newswires; 201-938-2118
Dow Jones Newswires
12-03-03 1209ET
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