The IRS is helping commercial real estate owners out with a new rule that allows REITs [real estate investment trusts] to pay up to 90% of their dividends in stock. After what we assume was much lobbying, the IRS changed the rule to help REITs conserve cash in a liquidity constrained environment.
We expect more REITs to take advantage of this rule in 2009, so while current yields on equity REITs are high -- about 8.5% on average -- much of that will come from new stock, not cash. This is beneficial companies, who are now able to meet distribution requirements with no cash, but hurts income oriented investors.
We are generally negative on this development, and would rather have companies cut their dividend instead of forcing new shares on investors. Many REITs including UDR Inc. (NYSE:UDR), Apartment Investment & Management Co. (NYSE:AIV) and Vornado Realty Trust (NYSE:VNO) have already announced some form of stock dividend.
We expect more REITs to follow suit as 2009 progresses. With commercial fundamentals deteriorating across all segments, REITs will keep more cash and give investors new shares. The rule is in effect through the end of 2009, although it will probably be extended if the outlook for commercial real estate does not improve.