Oil Prices & REITs - Jefferies: Will These 3 Dividends Be At Risk?

On March 11, Jefferies & Co. released a comprehensive research report: "Assessing The Oil & Gas Risk; Houston, You May Not Be The Only Problem."

The Jefferies research report pointed out a concern regarding a select group of REITs with exposure to oil and gas markets relative to their peer group, including: industrial REIT EastGroup Properties EGP, office REIT Parkway Properties PKY and diversified REIT Investors Real Estate Trust IRET.

Jefferies noted that "all share a risk factor relatively high dividend payout ratios of 116% [IRET], 112% [PKY], and 88% [EGP] of AFFO based on consensus estimates and the last quarter's annualized dividend."

Notably, on March 6, EastGroup announced its 141st consecutive quarterly dividend. EastGroup has increased or maintained its dividend for 22 consecutive years and increased it 19 years over that period.

Oil & Gas/REIT Headwinds

Jefferies proprietary research expects a "U-shape" recovery in the price of oil, rather than a quick "V-shape" rebound.

This longer time frame for a price recovery has negative implications for REITs which have exposure to tenants in markets where significant employment is dependent upon upstream oil and gas jobs and cap-ex.

Tale Of The Tape - Past Year

A Closer Look At Valuations

Jefferies noted that a "prolonged oil & gas recovery suggests downside risk to 2015/2016 earnings and could create further downside to these stocks, which are still trading well above their 5-year average forward P/FFO multiples."

Jefferies: Investors Real Estate Trust (IRET)

• IRET currently has "heavy exposure to the North Dakota, Montana, Wyoming and Colorado oil and gas markets."
• The company has announced plans is January to dispose of its office and retail assets during 2015.
• "The proposed sale would reduce exposure to Montana and Wyoming with a full exit in Colorado, but could create significant earnings dilution…"
• IRET's multi-family portfolio would still be significantly exposed to North Dakota and Montana (about 23% of the portfolio assuming a full sale of the office and retail assets).
• Any earnings weakness "and/or dilution from the proposed sale of the office/retail portfolio could have meaningful implication for the dividend given a current 116% AFFO/sh dividend payout ratio."

Jefferies: Parkway Properties (PKY)

• "At PKY, about 33% of annualized base rent comes from Texas, with 26% specifically from Houston."
• "About 15.8% of the Houston portfolio is scheduled to roll through 2015-2016; this represents about 3.6% of PKY's total portfolio."
• However, Jefferies also pointed out, "the risk of a rental rate rolldown is somewhat mitigated given the expiring leases already have pricing that is 15-20% below market rate."
• Of EGP's "top-ten tenants in Houston, 7 are in the oil & gas industry and account for ~35% of the Houston portfolio (8.6% of PKY's total portfolio)."
• Jefferies believes, "investors may be concerned that any weakness in earnings could have meaningful implication for the dividend given the current 112% AFFO/sh dividend payout ratio."

Jefferies: EastGroup Properties (EGP)

• Jefferies noted that "industrial tenants include companies that indirectly support the oil & gas industry such as rig, driller, pipeline and machinery part suppliers."
• EastGroup "has the most exposure with about 38% of annualized base rent derived from Texas with over 20% coming from Houston alone."
• "About 25% of the Houston portfolio is leased directly from the oil & gas industry."
• "Through 2016, about 11% of the Houston portfolio (2% of EGP's total portfolio) is scheduled to expire."