Real Estate: If It's Dividends You Want

REITs still promise decent payouts, even though their prices are coming under pressure.

Real estate investment trusts have been a rare haven for investors during the bear market, especially for those seeking a dependable income stream. After double-digit gains in 2000 and 2001, the industry closed out 2002 with a 2.4% total return, vs. a decline of 22.5% for the Standard & Poor's 500-stock index.

But fundamentals are turning against much of the industry. Analysts fear slumping earnings will drag down REIT share prices, offsetting at least some of their rich dividend payouts, which currently average 7.25%. Some analysts are warning investors to steer clear of office, apartment, health-care, and lodging REITs till 2004. David Schulman of Lehman Brothers Inc. advises clients to "underweight" 16 of the 31 REITs he tracks. "Personally," he says, "I've been buying tech stocks."

Maybe Schulman doesn't care about dividend yield, but many investors do, and many REITs still look good on that count--especially mall operators. Analyst Gregory J. Whyte of Morgan Stanley spotlights Chicago-based General Growth Properties Inc. (GGP ), which reported a 52% jump in third-quarter net income on a 31% rise in revenues. Moreover, its vacancy rate held steady at 11%, while rents on lease renewals climbed 16.5%. It recently boosted its dividend by 11% and vows to maintain it through 2003's third quarter. As for others in this category, Steve Sakwa of Merrill Lynch & Co. also likes Mills Corp. (MLS ), while Lee Schalop of Banc of America Securities picks Simon Property Group Inc. (SPG )

The industrial sector could also surprise investors. The rationale: Demand for warehouses and factories should revive quickly as the economy grows. At the top of analysts' lists is AMB Property Corp. (AMB ), a San Francisco REIT big in cargo facilities at airports and seaports.

If you still want an office REIT, Whyte suggests Boston Properties Inc. (BXP ) Admittedly, its portfolio includes two of the weakest markets today: San Francisco and hometown Boston. But Whyte says less than 5% of its leases come up for renewal in 2003. Worst case, he figures the REIT will return its 6.7% dividend. Not a home run by any means. But it would surely be a single or double in any market.

By Michael Arndt

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