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Are These 3 REITs Yield Traps?


Jun 13, 2020 by Matthew DiLallo

Three that appear as if they may be traps are Annaly Capital Management (NYSE: NLY), Brookfield Property REIT (NASDAQ: BPYU), and Macerich (NYSE: MAC). Here's a closer look at whether that's the case.

Reading the tea leaves

Mortgage REIT Annaly Capital Management currently yields 14%. While that's high compared to most REITs, mortgage REITs tend to pay big dividends. That's because they use a lot of leverage in their business, which makes them riskier.

That risk was on full display during the first quarter, as Annaly only produced $0.21 per share of core earnings yet paid $0.25 per share in dividends. Because of that, an analyst on the first-quarter conference call questioned the sustainability of the current payout rate. CEO David Finkelstein responded by saying:

We will have more formal guidance at a point in the future with respect to the dividend. What I will say is we recognize there certainly have been cuts in the sector … So, what I can tell you is that, we do expect to maintain a competitive dividend yield relative to peers, which has been in the low double digits over the past number of years on book value. So we're comfortable with conveying our competitiveness of our dividend yield. And we really want to spend the time over the very near term and not just look at the second quarter, but look at multiple quarters out and determine what we think the appropriate dividend yield is.

These comments hint that a dividend reduction could be forthcoming. Thus, Annaly Capital appears to be a dividend trap that investors should avoid until the company determines the reset dividend level.

The numbers don't back up the commentary

Brookfield Property REIT, which is the REIT equivalent of global real estate partnership Brookfield Property Partners (NASDAQ: BPY), currently yields more than 10%. One reason the yield has risen to such heights is that its stock price has tumbled about 25% this year. That's due to the impact the COVID-19 outbreak is having on its ability to collect rent. While Brookfield received more than 90% of the rent billed to office and multifamily tenants in April, it only collected 20% from retailers. Because of that, its FFO will likely decline over the coming quarters.

That's a concern because Brookfield only generated $0.33 per share of FFO during the first quarter while paying out $0.3325 per share in dividends. However, the company does have $7.2 billion of liquidity, including $1.8 billion of cash, which gives it plenty of cushion to continue paying the dividend. Further, CEO Brian Kingston wrote in the first quarter investor letter: "As we have stated in the past, our distribution policy is based on the long-term view of our business, with a healthy respect for the cyclicality of economic and real estate cycles. While a prolonged economic contraction would impact cash flow in the longer term, we continue to have more than sufficient resources to pay our stated quarterly dividend."

Thus, the payout seems safe for now, though there is an elevated risk that Brookfield might reduce it if there's a long downturn in the commercial real estate market.

You're not getting what you think

Mall-owner Macerich recently declared a dividend of $0.50 per share. With its stock currently trading at around $12 per share, it yields 16.7%.

However, there's a big catch with that dividend. Macerich is only paying out between $0.10 to $0.123269 per share in cash and the rest in stock. The company made that move, which included a 33% reduction in the per-share amount, to conserve some money given the impact the COVID-19 outbreak is having on rent collection. Another cut or temporary suspension of the dividend is possible given the current state of the retail real estate sector.

Be careful with big yields

REIT investors must do their due diligence before buying a stock to collect what seems like a lucrative payout. Both Annaly and Macerich's high-yielding dividends are yield traps. Meanwhile, Brookfield's big payout is in the high-risk category. Because of that, income-focused investors might want to wait to see how things shake out before buying these stocks for their yields since they might not be sustainable.

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Matthew DiLallo owns shares of Annaly Capital Management and Brookfield Property Partners. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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