Dividends, property rebound draw analysts to local REITs. (Wall Street West).

WHILE Wall Street has tumbled in the last three years, real estate investment trust stocks have been faring a bit better--with some exceptions.

Arden Realty Co. and Kilroy Realty Corp., two Los Angeles-based real estate investment trusts that have taken their lumps because of exposure to tech-driven office markets, could be in for a spurt.

A September report from New York-based brokerage house Morgan Stanley singled out Arden and Kilroy, along with Pasadena-based Alexandria Real Estate Investment Co., as among seven REITs nationwide primed for a rally.

Why the optimism? The bad news is out on these RELT stocks. The real estate markets they serve have either bottomed out or nearly have, and they now offer terrific dividends, reasoned Morgan Stanley analyst Greg Whyte.

An increasing number investors are looking for yield and dividend plays, instead of the fat capital gains sought in bull markets. Arden and Kilroy offer dividend yields of 8.9 percent and 9.3 percent, respectively.

Craig Silvers, founder of Los Angeles-based RElT money management shop Bricks & Mortar Capital, finds appeal in the Kiltoy story, but is a bit nervous about Arden.

"At Arden, they are paying out 94 or 95 percent of cash flow into their dividend," Silvers said, noting that further softness in its real estate markets could force a dividend cut. "But at Kilroy, the dividend is only 70 to 75 percent of cash flow," he said. "They are much less likely to cut their dividend."

Kilroy also has a lot of property in the South Bay, which might benefit from a defense build-up, Silvers said.