Real estate investment trusts (REITs) are pass-through entities intended to provide investors with large dividend payments. There are a number of REITs today that don’t live up to that and should be avoided by income investors, including Simon Property Group, Inc (NYSE:SPG), Tanger Factory Outlet Centers Inc. (NYSE:SKT), and Boston Properties, Inc. (NYSE:BXP).
REITs were specifically created to allow investors to invest in institutional level properties. These entities don’t pay taxes at the corporate level, but must pass on at least 90% of their earnings to shareholders.
That said, there are a number of REITs today that have gained the attention of growth investors. This has led to fast rising share prices and low yields. Often the yields aren’t enough to offset the risks of owning momentum driven shares. That’s particularly true for income minded investors. Here are some REITs that income investors should avoid or consider selling:
Simon Property Group, Inc (NYSE:SPG) is among the largest mall owners in the United States. It currently yields around 2.5%. The company cut its dividend sharply during the 2007 to 2009 recession and refocused around expanding its business.
That has worked out well for the company and shareholders intrepid enough to invest during the darkest of times when its shares lost about two-thirds of their value. Even those who simply held put made out reasonably well, as the company is trading near all-time highs well above the peak prior to the recession. And the dividend is now above its level prior to the dividend cut.
However, the easy money is likely to have been made by investors and by the company. Indeed, Simon Property Group, Inc (NYSE:SPG) won’t likely see the performance of its malls improve as dramatically in the future as they did coming out of the recession. Moreover, it’s so large that acquisitions have to be very large to be meaningful.
With an elevated stock price, growth minded investors are more likely to be disappointed than pleased going forward. This is a great company that isn’t worth the price right now.
Tanger Factory Outlet Centers
Tanger Factory Outlet Centers Inc. (NYSE:SKT) is another retail REIT. It is focused on owning factory outlet centers, as its name implies. The company’s occupancy has been impressively high since it came public, averaging over 95% even during the recent recession. This is a testament to the strength inherent to its business focus.
The problem with Tanger Factory Outlet Centers Inc. (NYSE:SKT) is that its shares yield even less than Simon Property Group, Inc (NYSE:SPG)’s shares, at under 2.5%. The reason for this is a steadily rising share price and a slowly increasing dividend. Although it has an impressive history of annual dividend increases, the shares are clearly being bought by investors focused on growth.
On that front, the rent levels at the company’s properties appear likely to offer years worth of rent growth. Moreover, with just 40 or so properties, expansion and acquisition activity will also be a notable growth driver. However, unless the dividend increases sharply from here, investors will need to see continued share gains to come up with a worthwhile total return.
Income investors shouldn’t take on the risk that growth disappoints. This is another great company where the yield simply isn’t high enough.
Boston Properties, Inc. (NYSE:BXP) owns an impressive collection of office properties in key markets. It focuses on the Manhattan, Washington, D.C., Boston, and San Francisco markets. These are high barrier to entry markets with high demand. The REIT is, without doubt, a great company.
Like Simon, Boston trimmed its dividend during the recession. Unlike Simon Property Group, Inc (NYSE:SPG), however, the distribution, hasn’t yet reached its level prior to the cut. The interesting thing about Boston Properties, Inc. (NYSE:BXP) is that before the recession it had been issuing a once a year special dividend that boosted investor returns notably (for example, the special dividend was $5.98 a share in 2007).