8 REITs at High Risk of Cutting Dividends and 3 Safer Options

by: Investment Underground

We took a look at a few high-yielders with lofty payout ratios. These types of companies tend to be “real-estate investment trusts” or REITs that distribute cash flows and earnings with different standards so dividends stay safe. However, we think these names could see some turbulence ahead, and may have to reduce the dividend payout. Instead, we recommend investors take a look at dividend stocks that are undervalued like Intel (NASDAQ:INTC), International Business Machines (NYSE:IBM) and Home Depot (NYSE:HD). Consider the below as a list of red flags that should be alerting investors:

Macerich Company (NYSE:MAC) is a REIT involved with retail real-estate in California, such as shopping malls and plazas. This equity pays out an amazing $2.00 dividend on just $0.23 reported, for a wholly unhealthy 8.7 payout ratio. But as this is an REIT, earnings are accounted for differently so what’s more important for the dividend will be the state of cash flows. Macerich is not looking good here either, with cash flow per share of $1.77 for a weak 0.68 coverage ratio.

The trust missed its Q1 2011 FFO (funds from operations, an important REIT metric) estimates by 10.3% and revenue growth is only expected to be 3% this year. Overall, annualized dividend growth has been negative, -2.47%. Blame the poor on low consumer confidence and hope that the stock shows strength as retail recovers, but it doesn’t seem like the change will come quick enough before MAC will need to cut its dividend again.

Healthcare Realty (NYSE:HR) oversees a trust that invests in nursing homes, hospitals and healthcare facilities. In general, healthcare REITs have been doing better than most, but HR doesn’t have the results to keep pace with its peers. The $0.04 loss per share can’t justify a $1.20 dividend, nor can flimsy cash flow per share of $0.85, which translates to a 0.71 coverage ratio. More bad news – the Q1 2011 FFO fell to $0.21 from $0.32 and the dividend growth has been stunted, going on a -14.49% annualized downtrend. With a below--average revenue growth of 8.4% expected, HR doesn’t seem like it can manage the dividend streams that other healthcare trusts might put out.

Kilroy Realty Corporation (NYSE:KRC) holds corporate office, industrial and research & development properties in a REIT based in southern California. It’s recently made some big business moves acquiring buildings in Bellevue, WA and San Diego, CA for $248 million total, but this doesn’t seem to be helping its bottom line. The dividend was cut to $0.35 per quarter from $0.58 in the midst of the recession, equivalent to a yearly shrinkage of -7.25%, but this still doesn’t seem to match up with its $0.02 loss per share. The stock revised its 2011 FFO guidance downward to $2.22-36 from $2.20-40 while analysts had expected an FFO centered on $2.31. Kilroy’s prospects don’t seem much better next year either, with only 7.4% revenue growth expected in 2012.

Alico Inc. (NASDAQ:ALCO) is a standout in this bunch for not being a REIT organization.That said, the company still manages property in the Florida region for agricultural purposes, mostly citrus, sugarcane and cattle. Alico recently hired a new CFO, Mark Humphreys, who will have a tough list of tasks before him when he steps in later this year. The dividend has been in a complete nosedive, falling 39.7% yearly, but the company is still paying out $0.40 on EPS of $0.28 for an unsustainable 1.43 payout ratio.

ALCO managed to report increased profits this year mostly due to citrus, cattle and sugar product prices rising on soft supply, but it still faces overall negative revenue growth by the end of 2011. The increased profit situation is only a temporary boost that will disappear by next year, and the company will no doubt have to leave its dividend in freefall.

Essex Property Trust (NYSE:ESS) is another west coast REIT, based out of Palo Alto, which manages residential communities a.k.a. apartment complexes. Some investors are bullish on housing REITs in this market because REITs can capitalize on the lack of new homes being built. This sentiment was enough for Essex to raise $115 million privately in senior unsecured notes. However, analysts note that “rents are through the roof (now), but that will plane off as new supply comes to market in the next 12 to 18 months, indicating that this is the big chance for a REIT to cash in. Essex has failed to do so, missing its Q4 2010 FFO estimates and falling short of its Q1 2011 FFO expectations again. Its cash flow per share provides just barely acceptable coverage at a 1.33 ratio but revenue growth is expected fall again to only 9.8% next year. With weak historical dividend growth at 4.97% annualized over the last five years, Essex won’t be able to create the returns that real-estate trust investors are hoping for.

AvalonBay Communities (NYSE:AVB) manages apartment communities as well, but with a focus on housing in the mid-Atlantic region. We’ve covered AVB previously in a similar investigation on IU here, and the prospects haven’t improved much since then. Just as is the case with Essex, there is strong economic support for AVB’s business – there’s a severe shortage of housing supply due to lack of new construction, while the young population needing living space keeps increasing.

However, this is another case of poor REIT execution as evidenced by a shaky $3.57 dividend compared to EPS of $1.55 and cash flow per share of only $3.85, for payout and coverage ratios of 2.3 and 1.08 respectively. Revenue growth is forecasted to decrease next year as housing supply recovers and at that point, Avalon Bay’s dividends will be in more trouble.

CBL & Associates (NYSE:CBL) holds retail mall and shopping center properties in its REIT role. As we know from the latest job and consumer confidence reports, this is still a poor economic environment for retail and CBL is no exception. Not only is the $0.84 dividend equal to an unsustainable payout ratio of 2.15, but the cash flows have been suspect. CBL reported Q1 2011 FFO at $.063, initially an improvement year over year from Q1 2010 FFO of $0.49. However, this figure actually includes $0.15 per share in funds from a one-time property sale, meaning FFO has fundamentally decreased YoY. During the recession, the stock was forced to slash dividends at a rate equal to an annualized -14.65% contraction. Also, consider that this year’s revenue growth is expected to be just 0.6% and CBL’s dividend future seems even dimmer.

Weingarten Realty Investors (NYSE:WRI) is a bit more diversified among REITs, with two discrete divisions managing either shopping centers or office and warehouse space all across the nation. Its dividend is standing on slippery footing, a $1.10 payment for only $0.06 in EPS. Further, the dual-division strategy doesn’t seem to be beating the market, as Q4 2010 FFO fell short of estimates by over 20% and Q1 2011 FFO missed estimates as well. This should instill some doubt in the ability of Weingarten to meet current 2011 analyst expectations of $1.79 in FFO, especially since guidance from the company is only in the $1.72-1.82 range. Weingarten’s track record contains an ugly -9.99% annualized yearly reduction in dividends over the last five years and its future only contains estimates for a 1.3% increase in revenues.

Now in stark contrast to this downcast report, consider the prospects of these 3 stable companies with strong dividend payouts, with some price upside as well:

The Home Depot (HD) has been hurt by the lack of consumer confidence in the recession but results have been rebounding much better than those of peers due to adroit management maneuvers. We previously covered some of these strengths in an article on dividend kings here. For the basics, HD has a strong 2.82% dividend yield that results in a manageable 0.48 payout ratio and a 2.91 coverage ratio. Even better signs: The 18.76% annual increase in dividends and the sector-relative cheapness of the stock indicated by a 1.13 PEG ratio.

International Business Machines (IBM) has been refocused on industrial IT and enterprise computing services, having divested itself of the consumer computing division years ago. Since then, the stock has managed an incredible 26.23% annualized dividend growth along with very low price volatility. The dividend yield is low right now, but can definitely undergo much future growth with a 0.25 pay ratio and a 5.2 cover ratio.

Intel Corp (INTC) is the well-known leader in the semiconductor industry, long undervalued as investors worry about the current paradigm shift to processors for smaller mobile devices. Intel will continue to thrive beyond a move to the computing “cloud” though, because the servers behind all the smartphones and tablets will most likely contain Intel technology. Right now, INTC pays a healthy 3.23% yield, for a 0.34 payout ratio, and has lots of cash flow for a 4.36 coverage ratio. The company’s dividend growth averages yearly increases of 14.51% and with earnings growth projected to be an above-average 11.5%, Intel’s forward P/E is only 9.3 and its PEG ratio of 0.83 is cheap as well.

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