Real estate investment trusts (REITs) are a wonderful way to own income producing property. They are an important cornerstone in any income portfolio. However, not all REITs are created equal. How should you think about size when it comes to a REIT's ability to consistently pay -- and increase -- dividends?
Getting bigger all the time
Realty Income (NYSE: O ) is a giant in the triple net lease space. In this niche, Realty owns properties on which its lessees pay maintenance, insurance, and taxes. That's virtually all of the expenses involved in owning a building, but the lessees are happy to do it because not owning the property frees up capital for growth.
Realty owns over 3,800 properties across 49 states. It's increased its dividend every quarter for 65 consecutive quarters. It's truly a wonderful company that has a specific focus on catering to individual investors' needs, including paying its dividend monthly and using investor friendly wording throughout its web site.
The consistency of the company, however, is the most impressive quality. And it's Realty's broad reach and diversity that provides that strength. In this case, being bigger is clearly an advantage.
Not enough market
Washington REIT (NYSE: WRE ) is focused on owning a diversified portfolio in and around Washington D.C. It's a generally strong market, driven by the U.S. government. The REIT, one of the oldest in existence, had an enviable record of annual dividend increases, until it cut its dividend in late 2012. The reason was a decision to exit certain property types, notably medical office buildings.
This is relevant not because that decision coincided with the dividend cut, but because Washington REIT felt that it couldn't continue to grow its medical portfolio without venturing outside of the D.C. area. Thus, it chose to sell out, clearly showing that its relatively small market focus is a limiting factor for its business model and, in the end, its ability to pay consistent dividends.
That said, the "key city" approach has its merits. For example, Federal Realty's (NYSE: FRT ) core markets include D.C., Boston, New York, San Francisco, San Jose, Los Angeles, Philadelphia, and South Florida. Although it focuses on retail, it also owns office and apartment properties. In some ways its approach is very similar to Washington REIT, only it's in more markets. Unlike Washington REIT, however, Federal's 40-plus year history of annual dividend increases is backed by the fact that it has plenty of room across its various markets to continue growing.
Size alone isn't enough
Simon Property Group's (NYSE: SPG ) portfolio of more than 325 malls makes it the largest mall REIT. Taubman Centers (NYSE: TCO ) is just a fraction of that size with just shy of 30 malls. Simon has used acquisitions to build itself into the industry's dominant player, while Taubman tends to build its malls from the ground up with a heavy focus on property location and management excellence.
Taubman's dividend survived the 2007 to 2009 recession, with distribution growth pausing for just one year. Simon's dividend was cut deeply in 2009. Buying the bigger REIT, in this case, didn't protect dividend-focused investors. The reason is that Simon is focused on company growth and has been for years, the dividend cut was just a symptom of that. At Taubman, quality has always been more important than growth.
Know what you own
It's never easy to judge a dividend's safety. However, knowing what you own is a key starting point. Simon proves that size isn't enough to protect a dividend, even though Realty Income shows that size can be a key support. At the same time, Taubman's focus has proven key in its dividend's strength, but Washington REIT's focus was its Achilles' heel.
In the end, you need to look past the dividend history and consider a REIT's business model in relation to its ability and desire to support and grow its dividend. The difference between the models at Washington REIT and Federal Realty, and Simon and Taubman are good examples. You might find that you like some of your REITs on the bigger side (Realty Income), and others small (Taubman).
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