Paying less in dividends or partially in stock would enable lodging REITs to maintain their cash positions. "Having more cash on your balance sheet helps with your debt ratios and allows you to continue with your renovations programs. Essentially it makes it appear that you have a healthier balance sheet," Scholes explains. "Right now, the problem with paying a cash dividend is, once you send that cash out the door, you will never get it back. The other problem right now is if you wanted to borrow, it's certainly much more difficult in today's environment. Let's say a REIT paid out $50 million in dividends, but it still needed that money. To go to the public borrowing markets and try to get $50 million is a lot more difficult now than it was a year ago. So they would rather use creative methods to retain their cash, and one of the ways would be to pay a stock dividend instead of a cash dividend."

David Loeb, senior research analyst and managing director at Robert W. Baird & Co. Inc. in Milwaukee, says he believes that the current rules allow for up to 80% of dividends to be paid in stock as long as the owner of the shares can choose between cash and stock subject to those aggregate limits. "What NAREIT wants is to increase the proportion of stock dividends to allow companies to be able to preserve more cash in this downturn. I think that is a fairly clever idea. When you start paying 100% stock dividends, essentially that looks just like a stock split and has no economic value. When you give people a choice then some will end up owning more shares and some will end up with cash and there's at least some economic benefit to receiving that. Companies are in a position now where they really want to preserve capital and it's a very smart thing to do."

Scholes expects that "most if not all" lodging REITs will significantly cut dividends from 2008 levels in 2009. "It's a reflection of lower net income, simply because the demand trends for hotel rooms and revenues are in the process of substantially falling from where they were a couple of months ago. Additionally, the companies want to maintain more cash and not pay it out. But the number one driver of cutting dividends is lower net income because of the poor economy," he says.

Even with dividend cuts, companies will maintain the distribution requirement of 90% of taxable income to maintain their REIT status, Loeb says. "If you pay only 90% then you have to pay tax on that last 10%," he says. "Most companies are unlikely to pay less than 100% of taxable income. I don't think we'll see anybody go under 100% unless the banks force that. My guess is that we will see more companies, unless they have an extraordinary distribution, pay a smaller cash dividend."