Opportunity Abounds In Battered REIT Market

Any investor looking to get into REITs now should also be aware that the currently attractive yields are something of an illusion. Both components that go into the yield equation appear certain to shift in ways that will bring yields back down.

As for stock prices, experts believe REIT shares have been beaten down so much that they're likely to rise — at least eventually — from prices that are near 10-year lows. That expectation assumes the government's efforts to ease the credit crunch will continue gaining traction.

With respect to dividends, yields are inflated because they're based on the level of payouts over the past four quarters. So if a REIT cut its dividend just last quarter, its current yield reflects a combination of the current payout level, and the higher level in the three quarters before the cut was made. Most REITs that cut recently aren't expected to return payouts to the old levels anytime soon.

The reality is that current dividend levels are in many cases unsustainable — debt troubles will eventually compel more REITs to cut payouts so they can shore up balance sheets.

While such cuts should help a REIT maintain long-term health, REITs must not cut so deeply that they jeopardize their tax-favored status. Many pay out greater than 100 percent of taxable income as dividends, so they've still got some room to cut.