REIT for the skies?

I happened to bump into one of my acquaintances in the fund placement business - in essence estate agents to the investment world. The "hot story" of the day where "smart investors" are putting their money to work is in real estate investment trusts (REITs).

Naturally curious, I pressed him as to why that's the case. "Because of the tasty dividend yields, you moron!". "That's it?" I queried. All I got was a shrug, as if there's no point in further discussion if I don't get it.

Heaven help anyone taking action based on such threadbare reasoning. Sure, some REITs may look compelling on a dividend yield basis, but these are based on projected future dividends. Whilst a REIT is obliged by legislation to maintain very large payout ratios (typically 80+ %), there is nothing to stop them not paying a dividend (for example if interest payments rise).

This is a problem for several REITs at the moment trying to "rollover" their financing. Assuming a bank will lend in the first place, the terms will be much dearer, thus cutting funds available for dividends. I don't exclude some REITs being great buys, but a blanket purchase would be crazy without some careful analysis. It's safe to say some familiar REIT names will disappear by the time this recession is done.