By Barry Vinocur

Ater roughly 10 straight years of posting impressive dividend growth—as payout ratios declined to historic lows—REIT dividends have hit a bump in the road. Nine REITs cut their dividends in 2003 and more dividend cuts are expected this year, including a handful of companies that may have to cut their dividends for a second time. Most forecasts project another year of modest dividend growth, at best.

To be fair, 58 REITs did increase their dividend payment in 2003 and some REIT subsectors (principally, though not exclusively retail) haven’t fallen on tough dividend times; in fact, they are posting record dividend increases. In some instances, even with those increases, the companies are bumping up against minimum allowable payout levels. Moreover, some of the companies posting double-digit dividend gains are on course to do it again this year.

Last year’s double-digit dividend growers included Alexandria Real Estate Equities, Inc. (NYSE: ARE), up 16 percent; CBL & Associates Properties, Inc. (NYSE: CBL), up nearly 11 percent; CenterPoint Properties Trust (NYSE: CNT), up 28 percent; Chelsea Property Group, Inc. (NYSE: CPG), up just over 10 percent; Developers Diversified Realty Corporation (NYSE: DDR), up 21 percent; and General Growth Properties, Inc. (NYSE: GGP), up 25 percent.

The hardest hit sectors from a dividend standpoint have been multifamily, lodging and office. Several apartment REITs not only have already cut their dividends (often by 20 percent, 30 percent, or more), but some also may have to cut yet again. And very few multifamily REITs currently have payout ratios that aren’t, well, pretty darn tight.

And, though there have only been a few office REIT dividend cuts, a number of office names including Arden Realty, Inc. (NYSE: ARI), Equity Office Properties Trust (NYSE: EOP) and Reckson Associates Realty Corp. (NYSE: RA) have payout ratios that already exceed their adjusted funds from operations. Moreover, those payout ratios are expected to come under more stress this year, as tenant improvements and leasing commissions take an even bigger bite out of office REIT cash flows.

As noted, the dividend pain definitely isn’t across-the-board, and with REIT earnings growth expected to begin trending up, if not this year then in 2005, the picture may not get a whole lot worse before it starts improving. Nevertheless, as a recent study by the REIT team at Prudential Financial highlighted, REIT dividend growth declined to its lowest level since the dawn of the modern REIT era the past two years—from an average 5.7 percent to 1.9 percent in 2001 and 2.1 percent last year, on a market cap-weighted basis. On an equal-weighted basis, the Prudential analysts reported the average REIT dividend declined 0.6 percent in 2003.

The data are clear, as is what needs to happen next. Since the dividend story is a cornerstone of the REIT investment thesis—along with diversification and the stocks’ historic strong total return track record—the industry needs to mount a major education effort now. This needs to be along the lines of what it has done in recent years to highlight the diversification theme by targeting individual investors, as well as financial advisers and pension plans.

My own discussions with high net worth investors and financial advisers in recent months have made clear that once the various natural REIT constituencies understand the issues, and how those issues may impact their REIT investments generally, that the benefits of REIT investing still far outweigh the short-term negative of what is likely to be a transient, but nevertheless significant, erosion of REIT dividend quality.

As history has hopefully taught REITland and REITsters, a proactive approach to investor/ adviser REIT education is much preferable to the alternative.