Investors might think now would be a good time to go in and find good deals-great buildings unfairly valued in the economic malaise. Indeed, Bloomer recently wrote in a Morningstar report that the firm's universe of REITs is 26% undervalued (with a 74% price to fair value). But the outlook for these companies is so uncertain that his group now says it wouldn't recommend purchasing a REIT stock unless the discount was 50%. Bankruptcies are likely, says the report.

"The whole space is exposed to the lending environment," says Bloomer, "and until that improves, most REITs are at risk. We think the space as a whole is cheap, but we're not really recommending very many until we get more clarity."

Another attractive REIT feature that should be tantalizing investors is the rising dividend yield. REITs are particularly juicy income investments, since they are required to pay out 90% of taxable income every year as dividends.

But even that has become a phantom feature, less tantalizing now when downward rent pressure and more desperate capital needs have forced many companies to cut or suspend their payouts. The yields may be at historic highs, but poor cash flow makes a lot of those dividends untenable. "We own some [REITs] but not very many because we like dividends and we're concerned that so many of them have reduced or had to eliminate dividends," says financial advisor Bob Haley, president of Advanced Wealth Management in Portland, Ore.

In their rush to recapitalize, many REITs have begun bringing new shares to market. Some analysts look askance at that, suggesting that it dilutes existing share prices. Cash-poor companies are also paying out dividends with more stock-a surefire way to anger investors who had come to the party for income.  

One REIT offering shares for dividends, says Bloomer, is Simon Property Group, an industry leader that will likely prompt others to follow the same strategy.

Good News?
To the extent that there's any good news in this space, Paul Curbo, a manager at the AIM Select Real Estate Income Fund, says it is that the sector is indeed poised for a good recovery when the economy heals itself. Although he concedes that the industry is going to be smarting for a while, that's mainly because of what's happening in the broader economy with the financial and liquidity crisis-and it has less to do with the inherent weakness of the asset class. The fundamentals of the companies themselves are fairly good, he says.

"Roughly in the last 30 days [ending April 27, 2009], REITs have raised roughly $6.8 billion of new equity capital," he says. "So I think that that's a good indication that investors are supportive of the asset class, supportive of the companies that have those good fundamental characteristics from a real estate perspective, and that companies are able to raise capital and move forward."

Those that are going to be the most successful, he says, are the ones taking a multipronged approach to refinance their debt maturities-by selling assets, delaying or reducing capital expenditures or raising new equity. He likes it when these companies bring new issues to market.
"I think the market has responded positively to it because it just shows that that source of capital is open to them," he says. "I don't think it's a cure-all, and I think the company management teams have been pretty forthright about indicating that they realize that there are a lot of different things that they can do in terms of reducing development, selling assets and refinancing debt. It can't just be equity offerings."

Curbo says his fund, which is rated five stars by Morningstar, has tried to shore up performance by focusing somewhat on the debt side of the equation-buying highly rated mortgage-backed securities and certain REIT corporate debt issues. "The idea being that until the credit markets stabilize and until the legacy paper begins to normalize in terms of its spread, the equity market is going to experience continued volatility and is going to have a tough time having a sustained rally until the debt markets are operating in a little more normal manner," he explains.