Dividend Growth Analysis: 7 Office REITs

 |  Includes: ARE, BDN, BXP, CUZ, DEI, EQC, OFC
by: Zvi Bar

REIT investors tend to invest in the asset class to gain exposure to real estate as a hard asset that is not highly correlated to the general stock market, and for the dividend income stream that the REIT model necessitates. By law, REITs must distribute at least 90% of their taxable income in order to eliminate the need to pay income tax at the corporate level.

This is an analysis of the value and dividend growth rates of 7 REITs that primarily own and offer office space. Office REITs are sensitive to economic cycles, the strength of the American consumer, entrepreneurial production and several other factors. Companies offering such space also have geographic and population density factors to consider, as well as possible state and local tax/regulation issues.

A continued economic downturn will undoubtedly weaken the demand for office space, as businesses will not expand and fewer new ones will be attempted. Conversely, improving economics should bolster expansion and entrepreneurial endeavors. Inflation is often weathered well by such companies, where rents are raised in accordance with the new value of money, but this does take some time to occur.
This is part 1 of a two-part analysis of dividend growth and general policy for numerous office REITs. Several non-REITs also compete in this industry. There are also other REITs that exist in this industry, and please let me know if you would like others in particular included in future analyses (and not covered in part 2). The REITs discussed in this part are, in alphabetical order:
  1. Alexandria Real Estate Equities Inc. (NYSE:ARE);
  2. Boston Properties Inc. (NYSE:BXP);
  3. Brandywine Realty Trust (NYSE:BDN);
  4. CommonWealth REIT (NYSE:CWH);
  5. Corporate Office Properties Trust (NYSE:OFC);
  6. Cousins Properties Inc. (NYSE:CUZ); and
  7. Douglas Emmett Inc (NYSE:DEI)
Alexandria Real Estate Equities Inc. (ARE)
  1. Current Yield: 2.29%
  2. Market Capitalization: $4.3 Billion
  3. Price to Cash-Flow: 17.1
  4. Price to Book: 1.7
  5. Short Position: 3%
  6. Yield Growth Analysis: ARE’s payouts have been volatile over the last few years. In 2006, ARE’s total payout was $2.64, which it increased to $3.04 in 2007 (a 15.1% increase). ARE raised the quarterly dividend within 2006 from 70 cents to 72, and then to 74. In 2007, ARE raised it to 76 and then 78 cents, raising the dividend on average about every 2 quarters through 2006 and 2007, In 2008, ARE paid out $3.98 (a 30.9% increase), including an extra dividend to end the year which if discounted would equal $3.18 (a 4.6% increase). ARE raised their quarterly payout to 80 cents in 2008, but ended up cutting it to 35 cents within 2009, when the total payout was $1.85 (a 53.5% or 41.8% decrease depending on whether you count the extra 2008 year end dividend). ARE maintained the 35-cent quarterly dividend until the end of 2010, paying out a total of $1.50 (an 18.9% decrease), when it raised the dividend to 45 cents. ARE has continued to pay a 45-cent dividend in 2011.
  7. NOTE: Primarily leases scientific research and development space.
Boston Properties Inc. (BXP)
  1. Current Yield: 1.92%
  2. Market Capitalization: $14.6 Billion
  3. Price to Cash-Flow: 38.3
  4. Price to Book: 3.3
  5. Short Position: 8.6%
  6. Yield Growth Analysis: BXP’s dividend has seen significant contraction, for 2 special reasons. In 2006, BXP paid out a total of $8.12, based upon quarterly dividends of 68 cents and a year-end $5.40 dividend. BCP paid out $8.70 in 2007 (a 7.1% increase), with the primary difference being a larger, $5.98 year-end dividend and the quarterly dividend remaining unchanged at 68 cents. In 2008, BXP paid no special dividend at the end of the year, and continued to pay out 68 cents per share for a total of $2.72 (either no change or a 68.7% decrease if you count the special dividend). In mid-2009, BXP cut their quarterly dividend to 50 cents and paid out a total of 2.18 (a 19.8% decrease). It has since maintained the 50-cent quarterly dividend policy, paying out $2.00 in 2010, including paying out at that rate into 2011.
  7. NOTE: BXP owns high-end office space in cities such as Boston, Washington, D.C., Manhattan and San Francisco.
Brandywine Realty Trust (BDN)
  1. Current Yield: 4.87%
  2. Market Capitalization: $1.6 Billion
  3. Price to Cash-Flow: 8
  4. Price to Book: 0.9
  5. Short Position: 5.4%
  6. Yield Growth Analysis: BDN had a 44-cent dividend per quarter policy in 2006, 2007 and 2008. In both 2007 and 2008, BDN paid out a total of $1.76. To start 2009, BDN cut the dividend from 44 cents to 30 (a 31.8% decrease) and then cut it by 2/3 to 10 cents a quarter later. The total payout for 2009 was 60 cents (a 65.9% decrease). In 2010, BDN raised the quarterly payout to 15 cents (a 50% increase), but the year-end total was still 60 cents (unchanged year-over-year). BDN has thus far maintained the 15-cent dividend in 2011.
  7. NOTE: Primarily owns office space in suburban locations in and around Pennsylvania, New Jersey, and Washington, D.C. among other locations.
CommonWealth REIT (CWH)
  1. Current Yield: 7.44%
  2. Market Capitalization: $1.9 Billion
  3. Price to Cash-Flow: 7.6
  4. Price to Book: 0.7
  5. Short Position: 1.8%
  6. Yield Growth Analysis: CWH’s quarterly dividend was reduced once, sizably, over the last five years and has since increased once, minimally. Through 2006, 2007 and 2008, CWH maintained an 84-cent dividend policy, though in some years, such as 2006, it paid 5 dividends while in other years, such as 2007, it paid 3 dividends (it paid 4 in 2008). CWH started off 2009 by reducing that quarterly dividend to 48 cents (a 42.8% decrease). In 2010, CWH raised the dividend to 50 cents, and has maintained that rate into 2011.
  7. NOTE: CWH’s properties are primarily located in Hawaii, on Oahu.
Corporate Office Properties Trust (OFC)
  1. Current Yield: 4.82%
  2. Market Capitalization: $2.3 Billion
  3. Price to Cash-Flow: 13.6
  4. Price to Book: 1.9
  5. Short Position: 5.7%
  6. Yield Growth Analysis: OFC has been able to consistently and conservatively raise its dividend through the recent real estate crisis. In 2006, OFC paid out a total of $1.18, which it raised to $1.30 in 2007 (a 10.1% increase). In 2008, OFC raised the annual payout to $1.425 (a 9.6% increase). In 2009, the payout increased to $1.53 (a 7.3% increase), and in 2010, OFT raised it to $1.61(a 5.2% increase). OFC has raised its dividend every 4 quarters over the last five years, and the current quarterly dividend of $0.4125 has been in place for 3 quarters. So it appears highly possible that OFC will raise its payout after the following quarter.
  7. NOTE: OFC’s properties are primarily located in the suburban surroundings of Washington, D.C, and its clients are mostly the U.S. government and government contractors.
Cousins Properties Inc. (CUZ)
  1. Current Yield: 2.1%
  2. Market Capitalization: $871.8 Million
  3. Price to Cash-Flow: 10.7
  4. Price to Book: 1.5
  5. Short Position: 4.7%
  6. Yield Growth Analysis: CUZ’s payout has diminished through the real estate crises, and continues to do so. In 2006, CUZ paid out $4.48, including a year-end extra dividend of $3.40. In 2007, CUZ maintained its prior 37-cent quarterly dividend and paid out a total of $1.48 (unchanged if you discount the 2006 special dividend). At the end of 2008, CUZ lowered its quarterly dividend to 25 cents, and paid out a year-end total of $1.36 (an 8.1% decrease). During 2009, CUZ lowered its quarterly dividend twice, ending at 9 cents, and the year-end total was 1.23 (a 9.5% decrease). In 2010, CUZ paid a total of 27 cents (a 78% decrease), and in 2001 CUZ halved the quarterly dividend to $0.045.
  7. NOTE: CUZ’s properties are primarily located in the state of Georgia.
Douglas Emmett Inc (DEI)
  1. Current Yield: 2.01%
  2. Market Capitalization: $2.4 Billion
  3. Price to Cash-Flow: 12.8
  4. Price to Book: 1.3
  5. Short Position: 11.8%
  6. Yield Growth Analysis: In 2006, DEI paid only one dividend of 12 cents, but in 2007, DEI raised it to $0.175 cents and paid it quarterly for a total of 70 cents. In 2008, DEI raised the dividend by a penny, but paid it only 3 times for a total of $0.5625 (a 19.6% decrease). In 2009, the dividend was lowered to 10 cents, though paid quarterly for a total of 40 cents (a 28.8% decrease). DEI maintained a 10-cent dividend through 2010 and into 2011.
  7. NOTE: DEI’s properties are primarily located in Los Angeles County.
Of the above-mentioned REITs, on a price to book, price to cash flow and/or present yield basis, BDN and CWH stand out as being below book with fairly low valuations. Still, CWH’s non-diverse properties may be an issue for concern, especially if Hawaii's real estate or economy takes a hit, and BDN’s suburban and D.C. exposure contains a whole separate set of risks, including possible government cutbacks and other potential beasts.

Several of the calculations used in deriving REIT dividend growth depend upon presumptions about each REIT's adjusted funds from operations (AFFO), or cash available for distribution. AFFO is usually calculated by deducting straight-line rent (average rent over the lifetime of a lease) and reserves for costs that cannot be directly recovered from tenants, such as general maintenance. Such analysis is always subject to change based upon future events and actions by the REITs and their tenants.
n closing, please note the reasonably high short positions on several of these names. Many REITs, though down from their peak prices, have appreciated considerably since the market collapse in late 2008 into early 2009. Some individuals believe a second major correction is due, while others may find that real estate is simply overvalued and likely to continue to depreciate over the next few years. Opinions differ and are certainly welcome.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.