REITs are on track to achieve a year of impressive dividend increases after a strong 2011 with average dividend payout ratios and historic dividend averages indicating there’s room for additional growth, according to industry experts.
As of June 5, 48 U.S. REITs had increased dividends–more than the entire number in 2010, according to SNL Financial. The increases occurred in every property type, although multifamily, hotel and healthcare REITs have been the most active in announcing increased dividends.
Only three U.S. REITs had decreased their dividends—Cedar Realty Trust, Corporate Office Properties Trust and Piedmont Office Properties Trust Inc. According to data from SNL Financial, all three REITs are underperforming their peers from a total return standpoint.
Currently, the average dividend yield is 3.38 percent—well below the five-year and 10-year average of 4.5 percent and 4.9 percent, respectively, according to SNL Financial. Moreover, the average dividend payout ratio—the percentage of earnings distributed to investors as dividends—is well below historic norms. Currently, the average payout ratio estimate for 2012 is 76 percent. Last year, it was 79 percent, according to SNL Financial.
One of the firm’s REIT experts, Jason Lail, points out that many of the dividend cuts that occurred in 2009 were the result of REITs trying to get a handle on their balance sheets and reduce leverage. As leverage has decreased, payout ratios have dropped as well. Leverage has been relatively flat in 2011 and 2012—about 38 percent compared to 59 percent in 2009.
Since REITs are required to pay 90 percent of their taxable income to shareholders in the form of dividends, a dividend increase can be viewed as a sign of strength and improved company earnings, Lail says.
Conversely, the decision to slash or suspend dividends could be a signal that a REIT’s core business is suffering, especially if its REIT peers are moving in the opposite direction. For example, at the height of the credit crisis and global recession, 30 listed REITs reduced their dividends, according to NAREIT. Another 18 suspended dividends entirely.
SNL Financial projects median FFO growth for 2012 and 2013 of 8.2 percent to 8.3 percent—indicating that REITs should be able to pay higher dividends due to improving year-over-year cash available for distribution.
On a sector basis, 11 multifamily companies had raised dividends through June 5, making it the property sector with the highest number of increases among North American real estate companies, according to SNL Financial. The hotel sector followed, with eight dividend increases, while the health care sector has had six dividend increases year-to-date. This trend represents a continuation from last year when healthcare and multifamily finished 2011 as the sectors with the highest number of dividend increases.
Post Properties Inc. became the latest multifamily REIT to increase its dividend, with a 13.64 percent hike announced May 30. In a written announcement, CEO David Stockert attributed it to the ongoing strength of the company's business and its solid financial position.
In contrast, Piedmont Office Realty Trust Inc. reduced its dividend by 36 percent, according to the company's 2011 Form 10-K, filed Feb. 28. Piedmont accredited the reduction to general economic conditions and the expiration of several large leases at its properties during 2011.
Meanwhile, Cedar Realty Trust Inc. slashed its quarterly dividend by 44.4 percent on Jan. 26 to 5 cents per share from 9 cents per share. CEO Bruce Schanzer said the move would help the company maximize its financial flexibility while it pursued its deleveraging and divestiture strategy.
Finally, Corporate Office Properties Trust reduced its dividend by 33.3 percent on Jan. 12 to 27.5 cents per share from 41.25 cents per share. President Roger Waesche Jr. said the reduction is part of the company's broader capital realignment strategy, consistent with its decision to sell noncore properties worth $570 million.
Interestingly, Corporate Office Properties Trust was just last year recognized by KBW Inc. as a REIT “Dividend” Honor Roll recipient. The Honor Roll identified 14 REITs that consecutively increased or maintained regular cash dividends since 2000 and whose 2011 adjusted funds from operations (AFFO) payment ratio is lower than 95 percent. The investment bank has not yet released its 2012 list.