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Now Cash-Constrained, REITs Face “Potential Existential Crisis”

The Real Deal

Covid-19 has been battering real estate investment trusts, some of which have had to shut down hotel, mall and other properties to prevent the spread of the virus. The closures have strained the cash flow of those companies, which are required to pay out the vast majority of their taxable income to maintain their REIT designation.


“It is a potential existential crisis for REITs,” said Joseph Gulant, chair of the tax department at Blank Rome.

Companies that are classified as REITs, which own, operate or finance real property, pay out 90 percent of their taxable income to investors, income that REITs don’t pay taxes on.

As taxable income slows because of Covid-19, the burden of making those dividends may cause some public REITs in particular to slash payments or up the amount of stock they are allowed to pay out in lieu of cash. Others have opted to delay or suspend payments for the time being.

For instance, Park Hotel & Resorts said it was pushing its first-quarter dividend to April, though dividend payments could be suspended until the end of the year. City Office REIT said Wednesday that because of Covid-19 uncertainty, it was issuing a dividend of 15 cents per share for the quarter, down from nearly 24 cents last quarter. And mall owner Macerich said because of the uncertainties surrounding the coronavirus and the need to remain financially flexible, 80 percent — the highest allowable amount — of the firm’s dividend would be paid out in stock, with the rest in cash.

“It is phantom income,” Gulant said of REITs opting to pay out greater proportions of dividends with stock. “There’s nothing [investors] can really do about it but groan.”

"Now Cash-Constrained, REITs Face 'Potential Existential Crisis'," by Mary Diduch and Rich Bockmann was published in The Real Deal on March 25, 2020.