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REITS: How to Play It

Some real estate investment trusts offer attractive dividend yields but investors need to consider cash flow and long-term prospects.



) -- Investors considering real estate investment trusts need to gauge a REIT's payout ratio as well as the prospects for commercial real estate in an uncertain economy.

Two of the names featured in


10 A-Rated Mid-Cap Dividend Stocks are REITS, including

Urstadt Biddle Properties

(UBA) - Get Free Report

of Greenwich, Conn. and

National Health Investors

(NHI) - Get Free Report

of Murfreesboro, Tenn.

Considering the Payout Ratio

A REIT's net income, calculated by generally accepted accounting principles (GAAP) is not generally considered the best indicator of cash flow and the ability to cover dividend payouts, since it includes non-cash items such as straight-line depreciation of improved properties and amortization.

For Urstadt Biddle Properties, net income applicable to common shareholders for the third fiscal quarter ended July 31 was $4.5 million, or 18 cents per Class A share, while the dividend payout on the shares was 24.25 cents a share. At first glance, an investor might think the company is paying out more than it earns.

REITs commonly use another earnings measure called funds from operations, or FFO, which is defined by the National Association of Real Estate Investment Trusts as GAAP net income, "excluding gains (or losses) from sales of properties plus real estate related depreciation and amortization and after adjustments for unconsolidated joint ventures."

Urstadt Biddle's FFO for the fiscal third quarter was $8.5 million, or 34 cents per Class A share, which more than covered the dividend. For the four quarters ended July 31, FFO totaled $28.9 million or $1.16 per Class A common share while the dividend payout was 97 cents a share, which leaves a back-of-the-envelope payout ratio of 84%.

For National Health Investors, second-quarter net income was $19.2 million or 69 cents a share, while FFO was $19.9 million, or 72 cents a share, exceeding the dividend of 60.5 cents a share that will be paid on September 30. FFO per share for the four quarters ended June 30 was $2.77 while dividends totaled $2.35 per share, for a payout ratio of 85%.

Of course, there are other factors for investors to consider besides the ability to cover dividends. One area is revenue growth. For Urstadt Biddle, total revenue for the third fiscal quarter ended July 31 was $63.5 million, an increase of 1% from a year earlier. For National Health Investors, second-quarter total revenue was $19.2 million, increasing 31% year-over-year.

Shares of Urstadt Biddle Properties closed at $18.54 Friday, returning 28% for the previous 52 weeks assuming reinvested dividends. National Health Investors closed at $46.06, for a 50% return over the previous year.

With both companies supporting their attractive dividend payouts and trading near the top of their 52-week price ranges, income-seeking investors considering these REITs need to consider each company's real estate portfolio.

Urstadt Biddle mainly holds shopping centers, office buildings and industrial properties in Connecticut, New York and New Jersey, while National Health Investors owns or holds mortgages on over 100 healthcare facilities in 21 states. Both portfolios have performed well, considering the overall economic weaknesses, but the market has clearly favored NHI over the past year.


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Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.