REITs: Surviving A Recession

by: Beyond Saving


Many investors look at REITs as income investments.

What happens when REITs are cutting their dividends en masse?

I try to put myself in the shoes of an income investor and look at the impact the 2008 recession had on REIT dividends.

One of the things I love about Seeking Alpha is the activity of readers and fellow contributors in the comment sections. I find them to be a great source of information and inspiration.

In a recent article, reader elliot_mllr posted the following comment,

Beyond Savings:One point you might want to consider is that there are investors, of whom I am one, who invest for income. The yield on EGP is under 3% while my yield on cost for my STAG holdings, bought during the downturn, is 6%. And total return is only relevant if one intends to sell the yield creating equity in question. So I am willing--at least for the time being and while carefully watching management's performance--to hold STAG for my yield on cost, and to disregard the stock price. If the dividend is sustainable, that's more meaningful to me than the total return if I have no intention to sell. Dividend sustainability is more significant to me than share price if I am happy with the yield and don't intend to sell.Elliot Miller

Which inspired me to ask the question, "What would have happened if you were dependent upon income from REITs in 2008?" I don't invest for income, virtually all of my dividends are reinvested, although from time to time I might cash out some dividends for a major purchase. So in many of my writings, I do not put myself in the shoes of the income investors who make up a large portion of the REIT article audience.

As they say, history rhymes, so from an income investor's point of view, what did 2008 look like? I set out to answer this question with the 20/20 vision of hindsight. I started by creating a list of 24 REITs which existed prior to 2008. I attempted to create a list of REITs that was diversified by sector (14 sectors), size (market caps of $60 million to $11.2 billion), and yield (1.94-10.16%).

I assume an initial investment of $1,000,000 and that the amount was divided evenly among the REITs using the opening share price 1/1/2008. I calculated the initial yield based on the annualized 1st quarter dividend. Then I looked up the actual dividends paid through 2013 and used the closing price on 12/31/2013 as the final price.

The Total Portfolio

The list of REITs I looked at in alphabetical order are:

American Campus Communities (ACC)

Brandywine Realty Trust (BDN)

CBL Properties (CBL)

Cousins Properties Inc. (CUZ)

Digital Realty Trust (DLR)

EastGroup Properties Inc. (EGP)

EPR Properties (EPR)

Equity Residential (EQR)

Essex Property Trust (ESS)

Extra Space Storage (EXR)

Federal Realty Investment Trust (FRT)

Gladstone Commercial (GOOD)

Hersha Hospitality (HT)

Kimco Realty Corporation (KIM)

Lexington Realty Trust (LXP)

National Retail Properties (NNN)

Realty Income (O)

Omega Healthcare Investors (OHI)

Prologis (PLD)

Public Storage (PSA)

Simon Property Group (SPG)

UMH Properties (UMH)

Ventas (VTR)

W.P. Carey (WPC)

Investing in even amounts across all 24 REITs, $1 million would have produced $58,224/year in dividends. A yield slightly over 5.8%. A rather healthy amount for many retirees to live on.

By 2009, 12 of the REITs cut their dividend, 8 raised their dividends and 4 maintained their dividend.

2008 2009 2010 2011 2012 2013 Capital Gain
Portfolio $58,224 $43,155 $43,432 $46,761 $50,778 $57,093


In 2009, income would be slashed $15,069, approximately 26%, where it would stay for two years before starting to grow again. It would take until the end of 2013 for the income to recover.

On the positive side, if the investor toughed out the income cut, they would have their income along with a 24.3% unrealized capital gain. Considering this was a real-estate centric recession, REITs proved to be quite resilient. However, a 26% cut in income is a lot for most people to absorb. Would a more targeted strategy reduce the pain?

Low Yield

Under the theory that low yield is less risky, I looked at a $1-million investment spread across the 12 lowest yielding REITs. These yields ranged from 1.94% to 5.31%. This group, from lowest yield to highest, included: HT, FRT, PSA, DLR, PLD, SPG, ESS, VTR, KIM, EGP, ACC and EQR.

This group experienced 5 dividend cuts, 4 dividend raises and 3 dividends maintained. Naturally, the low yield group started with a lower income level of $39,280.

2008 2009 2010 2011 2012 2013 Capital Gain
Lowest Yield $39,280 $33,604 $34,837 $38,887 $42,690 $46,272 $231,378

The reduction in 2009 was lower at 14.4%. Additionally, this group rebounded much faster with income being substantially restored by 2011 and by 2013 it was actually 17.8% above the initial income level.

The biggest losers in this group were HT, PLD and KIM. All three of which experienced both dividend cuts and capital losses for negative total returns.

High Yield

Those who use a high-yield strategy are often criticized in comment threads as "yield chasers" and accused of buying "sucker yields." Surely those chasing the highest yields were punished in 2008, right?

This group, from highest to lowest yield, included: BDN, LXP, GOOD, CBL, UMH, EPR, OHI, EXR, CUZ, NNN, O, and WPC. Yields ranged from 5.94% to 10.16%. This group experienced 7 dividend cuts and 4 dividend raises.

2008 2009 2010 2011 2012 2013 Capital Gain
Highest Yield $77,168 $52,705 $52,026 $54,635 $58,866 $67,914 $255,358

Starting with the highest income level at $77,168, the high-yield group fell a long way, dropping almost 32%. That hurts; however, it is worth noting that even after the drop the high yield group had a higher income level than any other group. It failed to fully recover the income level, 5 years later it was still down 12%.

Surprisingly, the high-yield group had capital gains similar to the other groups. In fact, only two REITs in this group had a negative total return, CUZ and LXP. As a result, the high-yield group had a higher total return than the total portfolio and the low yield group.

There does seem to be some support of the notion of a "sucker yield" in that of the 5 REITs with yields over 8%, only GOOD avoiding cutting their dividend.

Stuck In The Middle With You

A third investing strategy is to aim for the middle, avoiding REITs with the lowest payouts while avoiding the higher risk of REITs with high yields. The initial yields ranged from 4.19% to 7.17%. The middle group, in ascending yield order, are: ESS, VTR, KIM, EGP, ACC, EQR, WPC, O, NNN, CUZ, EXR and OHI.

This group experienced 4 cuts and 5 raises.

2008 2009 2010 2011 2012 2013 Capital Gain
Mid Yield $56,707 $47,802 $47,341 $49,829 $54,255 $63,918 $428,088

This group started with an income level close to the total portfolio investment. Like the others, it experienced a drop, but a smaller one. It managed to recover most of its income by 2012 and by 2013 income was 12.7% above the initial level.

This group excelled at capital gains, soundly beating the other groups.


2008 2009 2010 2011 2012 2013 Capital Gain IRR
Portfolio $58,224 $43,155 $43,432 $46,761 $50,778 $57,093 $243,368 7.20%
Lowest Yield $39,280 $33,604 $34,837 $38,887 $42,690 $46,272 $231,378 6.17%
Highest Yield $77,168 $52,705 $52,026 $54,635 $58,866 $67,914 $255,358 8.24%
Mid Yield $56,707 $47,802 $47,341 $49,829 $54,255 $63,918 $428,088 9.33%

Looking at the consolidated table, the differences between the strategies are more clear. From a maximizing income perspective, the high-yield picks fared quite well despite the largest cut in income.

Targeting the middle can help avoid the volatility found at the highest yields and among this sample produced the highest returns.

The low yielders did not provide safety in the recession, with some low yielding large-caps like PLD, SPG and KIM all cutting their dividends. While screening for size and low yields did not protect from dividend cuts, the lower yield REITs did recover faster.

REITs are attractive targets for income investors, thanks to their large and mostly predictable dividends. In general, REITs held up well and those who did not panic saw most of their investments recover. Of the 24 REITs I looked at, only 5 had a negative total return over the period.

If you are relying on REITs as a source of income that you are surviving off of, make sure you can survive potential cuts in a recession. The data here suggests you should be prepared for cuts of up to 20-40%, depending on the risk level of your strategy. The last situation you want to be in is being forced to liquidate for income when prices are low.

One thing that is very clear is that it is unrealistic to believe you can make perfect picks that will avoid dividend cuts through a major recession. Many of the names that cut their dividends during the recession were very large companies with very good reputation.

The last time around, most REITs recovered their dividends in 4-6 years. So in my opinion, that would be a good time range to have a plan in place to replace, supplement or be prepared to live without that income.

Personally, I would be slightly paranoid to live off of income from REITs as anything other than "extra" money. I have always thought that when I reach 70 I would start looking for a time to cash out and move my money into a SPIA. I am not really interested in stressing over a recession or getting a pay cut when I'm in my 70s or 80s.

Disclosure: I am/we are long PLD,LXP,BDN, EPR,O,SPG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.