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REIT Investors Can Expect Dividends to Be Paid Mostly in StockREIT Investors Can Expect Dividends to Be Paid Mostly in StockStrauss, Lawrence C.Barron's (Online); New York Real-estate investment trusts are known for their dividends. But as the coronavirus pandemic worsens and various REIT tenants are cash strapped during the impending recession, investors should prepare to start receiving more of their dividends in stock. "I have little doubt that the REITs will begin paying dividends largely in the form of their own stock," says Robert Willens, a tax and accounting expert who runs an eponymous consultancy. "That happened during the previous financial crisis, and it will almost certainly happen again." REITs are required to pay out at least 90% of their taxable income to shareholders annually. The reason why REITs are on the hook for paying out dividends, even if their cash flow dries up or falls sharply, involves accounting rules. Consider a hypothetical company called REIT A, which owns a few malls . Its tenants, mostly restaurants, retailers and movie theaters, have shut down, and many of them can't pay the rent. Under accounting rules, the REIT must "accrue" that rent income, even though it didn't receive any cash payment, says Willens. On the books at least, Willens explains, there is "plenty of income that will have to be distributed to the shareholder but without an influx of cash to actually make those dividend payments." As a result, he says, "There won't be sufficient cash to satisfy the dividend obligation. The only thing they can turn to is their stock." The U.S. Internal Revenue Service requires REITs to pay at least 20% of their dividends in cash, says Willens. During the financial crisis of a little more than a decade ago, that cash payout minimum was lowered to 10%. It's a way for the REITs for preserve cash in tough times. This impending recession is expected to hit some REIT sectors harder than others, with apartment operators and other residential sectors in relatively better shape, to cite one part of the market. "You're going to see cash-flow disruption in health care, senior housing in particular; retail; lodging, and the net-lease sector," says Michael Knott, head of U.S. REIT research at Green Street Advisors. The net-lease sector typically refers to stand-alone, single-tenant buildings that can house everything from a pharmacy to a movie theater to a casual-dining restaurant. "In this economic downturn, the normal cash-flow stability of commercial real estate is thrown into at least a temporary downturn in some of these property types where you never have had to expect to defer or provide relief to a large chunk of your tenant base," says Knott. This trend of switching to paying out dividends largely in stock has begun. On March 16, for example, Macerich (ticker: MAC), which owns, operates and develops high-end malls around the U.S., said that it will cut its quarterly dividend to 50 cents a share from 75 cents—and that it will be payable with 20% in cash and the rest in its common stock. In a press release, the company said that the combination of the dividend cut and paying out a lot less in cash will result in the company retaining more than $98 million in incremental cash on a quarterly basis. Not receiving as much of a cash dividend will no doubt disappoint those investors who count on the income. One potential longer-term benefit of receiving stock in lieu of cash, however, is that REIT share prices have taken a big hit. Assuming a company can make it through the pandemic crisis, investors could be getting shares at pretty cheap prices. "From a headline standpoint, it's not ideal for individual investors who want to own REITs for stable income and steady growth in that income," says Knott. He adds, though, that it's "one of many tools to preserve liquidity" for REITs. As of Thursday's close, the FTSE Nareit All Equity REIT index has lost 28.2% year to date, compared with a 21.4% decline for the S&P 500. |
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Msg # | Subject | Author | Recs | Date Posted |
13146 | Re: REIT Investors Can Expect Dividends to Be Paid Mostly in Stock | rlp2451 | 0 | 4/5/2020 4:11:12 PM |