BlackSwan Zine

Jan. 15 (Bloomberg) — A dozen U.S. real estate investment trusts, part of an industry that raised $33 billion last year, likely will increase their next quarterly dividends.

Public Storage, Annaly Capital Management Inc., and Inland Real Estate Corp. are among those that may boost payouts, data compiled by Bloomberg show. Vornado Realty Trust said this week it would resume paying its dividend fully in cash after a year of issuing it partially in stock.

“I do see the strongest companies perhaps increasing their dividends,” said James Sullivan, an analyst with Green Street Advisors, a Newport Beach, California-based real estate research company. “They’re going to have to be very careful about forging forward too soon and forging too far paying out more than they really can afford to.”

Dividend payments are the biggest draw for REIT investors, said Chris Henderson, a senior analyst at SNL Financial in Charlottesville, Virginia. U.S. law requires the companies to distribute 90 percent of their annual taxable income to shareholders in the form of dividends. Fifty-nine U.S. REITs cut or suspended their payouts last year, the most since 2000, according to SNL.

Three of the 12 REITs that may increase dividends specialize in mortgage investments, while the remainder are focused on property, according to the data. The forecasts are based on seven criteria including company guidance, regression analysis, and put-call parity from the options market.

Dividend Yield

The dividend yield for mortgage REITs was 14.6 percent on Jan. 13, compared with 3.7 percent for those that own property, according to the Washington-based National Association of Real Estate Investment Trusts. The yield on the 10-year Treasury note was 3.74 percent yesterday, according to Bloomberg data.

In the first nine months of 2009, the average net income for property-owning REITs plummeted 73 percent from the year- earlier period to $22.7 million, according to SNL.

Landlords came under pressure in 2009 as rising unemployment cut demand for apartments, offices, retail space and distribution centers. The jobless rate increased through most of the year, reaching 10.1 percent in October before falling to 10 percent the next month and staying at that level in December.

Some companies needed to preserve cash to pay debt coming due, Green Street’s Sullivan said.

REITs sold more than $22 billion in equity in 2009 and another $11 billion in debt, according to SNL.

Cash and Stock

Vornado said last January it would split dividends between cash and stock as it sought to build reserves and “protect against uncertainties in the capital market.”

The New York-based company sold almost 17.3 million shares in April and repurchased notes due in 2009, 2010 and 2011. It had $2.56 billion in cash and cash equivalents at the end of the third quarter, up from almost $1.53 billion a year earlier, according to regulatory filings.

REITs may now be in a better position to refinance as credit markets thaw, Henderson said.

Public Storage, the Glendale, California-based self-storage company, maintained a dividend of 55 cents a share last year. The payout probably will increase to 58 cents for its next quarterly payment, according to the Bloomberg data.

Bloomberg’s dividend forecasts had a global accuracy rate of 85 percent in the fourth quarter, compared with 65 percent for market analysts.

Clem Teng, vice president of investor relations at Public Storage, said the company’s board hasn’t announced its next dividend. Its policy is to pay the minimum required to maintain tax status as a REIT, Teng said.

Annaly, Hatteras

Annaly and Hatteras Financial Corp., which invest in Fannie Mae and Freddie Mac-backed home loans, are projected to extend a streak of dividend increases.

New York-based Annaly announced three dividend increases last year, including a planned 75-cent payment for the fourth quarter, according to company statements. It may increase to 80 cents, Bloomberg data show.

Hatteras, which announced payout increases four times in 2009, likely will boost its dividend to $1.25 after a $1.20 payment for the fourth quarter.

The companies profit by using borrowed money to buy securities tied to home loans. With mortgage rates around 5 percent and the Federal Reserve keeping interest rates near zero, “that leaves a lot of spread,” said Merrill Ross, an analyst at BGB Securities Inc. in Arlington, Virginia.

‘Buy’ Ratings

Ross rates Annaly and Winston-Salem, North Carolina-based Hatteras “buy” and expects both companies to increase their dividends.

Kenneth Steele, Hatteras’s chief financial officer, and Michael Farrell, Annaly chairman and chief executive officer, didn’t return telephone messages for comment.

Inland, a retail REIT, probably will raise its dividend to 5.5 cents a share from 4.75 cents, according to a Bloomberg forecast. The last time it boosted its dividend, which it pays monthly, was in 2007.

Inland’s board continually reviews its dividend policy and if and when it is changed it will announce it then, said Matt Tramel, a spokesman for the Oak Brook, Illinois-based company.

By Brian Louis for Business Week

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