randian said…
How do these dividends dilute shareholders? A stock dividend is essentially a forced DRIP, which I’ve never seen seriously argued as diluting the shareholders participating in them.

January 19, 2009 12:30 AM
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REIT Wrecks said…
Hi Randian, thanks for the comment. It’s not a DRIP, it’s a split, and as to why/how they are dilutive — the entire question misses one of the main problems with this: declaring a stock dividend maintains the “yield”, but will investors ever see the actual cash? In some cases, it’s unlikely, so that yield is bogus. Look at JER – 125%??

Some of these REITs will have no choice but to de-reit, and in that event the cash payout will never be at least 90% of taxable earnings. In other words, what good is the new stock? In some cases it could be totally worthless. I would rather have cash, at least I could pay my taxes on the dividend.

In the case of a healthy REIT that is able to maintain REIT status and resume paying dividends in cash, it is definitely dilutive. The same amount of operating earnings must be allocated over a larger base of shares.

Let’s assume there are 100 shares outstanding. Let’s also assume there is $1000 in distributable earnings. In that case, everybody gets a $10 dividend.

However, if the REIT distributes shares instead of cash, then the number of shares outstanding increases accordingly. Hypothetically, let’s say the number of shares outstanding rises by 20% because of a stock dividend or a series of stock dividends. The new total shares outstanding would be 120 shares. However, the REIT still has to pay dividends, and with the same $1000 in distributable earnings, investors would only see $8.33 in cash per share instead of $10.

In theory, you would be indifferent only if you held onto all of your shares and distributable earnings eventually increased by the same amount as the tax liabilities you incurred on the stock dividends. It’s a mess!

January 19, 2009 12:30 PM

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randian said…
In the case of a healthy REIT that is able to maintain REIT status and resume paying dividends in cash, it is definitely dilutive. The same amount of operating earnings must be allocated over a larger base of shares.

How can that be true, unless you’re assuming the REIT’s return on retained cash is zero? Or are you saying they made no money so they have no cash to retain? In that case why do they need to pay a dividend? Since dividends don’t need to be paid if there are no profits, a REIT could lose money for years without paying one and without the IRS requiring it to de-REIT.

I thought these stock dividends were in lieu of cash so the REIT could retain earnings, which is normally impossible under the 90% payout rule. If they are not, the REIT has no cash to retain, then I see your point. This is the worst of all worlds: the shareholders get a tax obligation with no cash to pay for it, and the company gets no offsetting cash infusion to improve operations.

January 19, 2009 2:43 PM

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REIT Wrecks said…
Hi Randian, thanks for writing back. You hit it on the head. The wither and the where? Which REITs are simply playing delay of game, and which are the REITs that can actually reinvest the cash at an accretive rate?

For the latter, this revenue ruling could be brilliant. For the former, shareholders are getting totally stiffed in favor of lenders and bankers (which, if you think about it, is as it should be).

Just remember, the only reason they’re doing this is because they are not bankable (for the most part) and cannot raise new money. If nobody else will touch them, why would you want to be the lender of last resort?

There just isn’t much room for error. Mezzanine loans are losing 60-100% of principal in this environment, so I think the investing focus should be a defensive play on equity REITs in areas like healthcare or apartments, but it HAS to be low leverage. AIMCO is simply using the cash to pay down debt. Presumably that will enhance cash flow someday, but who knows. Each company is situation specific. It’s fascinating, but it really is a mess.

January 19, 2009 3:29 PM

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Patrick Harden said…
Another stock dividend:

DiamondRock Hospitality Company today announced that it will not issue any further dividends in 2008 and intends to issue its next dividend to its shareholders of record as of December 31, 2009. The 2009 dividend will be an amount equal to 100% of the Company’s 2009 taxable income. Moreover, the Company plans to take advantage of Internal Revenue Service’s Revenue Procedure 2008-68 in order to pay a portion of that dividend in shares of common stock and the remainder in cash.

January 20, 2009 6:23 AM

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Patrick Harden said…
NorthStar finally gives up the ghost:

NorthStar Realty Finance Corp. (NYSE: NRF – News) today announced that its Board of Directors has declared a dividend of $0.25 per share of common stock, payable with respect to the quarter ended December 31, 2008. The dividend will be paid in a combination of cash, not to exceed 40% in the aggregate, and common stock, and is expected to be paid on February 27, 2009 to shareholders of record as of the close of business on January 28, 2009.

January 20, 2009 1:21 PM

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crabsofsteel said…
> AIMCO is simply using the cash to pay down debt

not so sure they’re even doing that, as they are 30 days late on a $14.8MM loan on a MF in Ohio.

January 20, 2009 1:28 PM

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Anonymous said…
Hi!
I enjoy reading your blog–very informative.

I’m surprised no one (that I’m aware of) has mentioned the huge positive the stock dividend ruling has on REIT preferred stock. Here, I’m focusing on non-(seriously)distressed equity reits. REITs like EPR, LXP, BDN, FR, etc. all have yields in the 16-20% range. If you stress test these companies, especially in light of the new ability to pay dividends in stock, you would need near apocalyptic vacancy rates for the preferred dividends to be eliminated. Again, I’m surprised no Wall Street analyst has gone through this exercise.

January 21, 2009 9:37 AM

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crabsofsteel said…
> all have yields in the 16-20% range

possibly because us Wall St. analysts are aware that in order to preserve cash, those dividends can be paid out in stock instead of cash.

January 21, 2009 9:48 AM

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Anonymous said…
Maybe I wasn’t clear. Those and others equity REITs have preferred yields of 16%-20% and my point was now the companies have more flexibility (if needed). Preferred holders should rejoice at this new ruling.

January 21, 2009 10:45 AM

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crabsofsteel said…
Let me put it this way: whether via REIT or RMBS or CMBS or CDO or just improvements, it may not be the smartest time to go long real estate. Ask the Donald.

January 21, 2009 5:13 PM

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Anonymous said…
an RMBS can be paid out in stock?

January 21, 2009 8:16 PM

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REIT Wrecks said…
Anon – great point on the pref coverage. I think it deserves an article. Crabs, which AIMCO property in Ohio? I have looked at almost everything they have left there.

January 22, 2009 6:37 PM

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mike said…
Not Crabs, Crabsofsteel, if you please.

The property name is AIMCO Chimneys of Oak Creek Apartments
or if I am mistaken Burgundy Court.

This is publicly available data, but you won’t get it from a google search.

January 22, 2009 8:17 PM

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Gene said…
Recently the banks have reclassified large assets from “available for sale” to “held to maturity” thereby escaping the accounting mark to market rule. In many situations this may be more realistic.

Shouldn’t this trend have a positive effect on REITS?

January 31, 2009 4:41 AM

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REIT Wrecks said…
Hi Gene, re your earlier question (sorry it took me so long), yes, the post on the commercial real estate bust identifies the fundamental reason to favor REITs that invested prior to 2005.

And yes, 10Qs do not adequately dress LTVs, but even if they did, you’d have to rely on the underwriters to get it right. For CMBS, up to date information can be found in servicing reports, but for whole loans you’ll never really know what the LTV is or whether it’s accurate.

Re: “available for sale” or “held to maturity”, I’m afraid it’s too late to fool everyone with this. If you’re talking about large real estate assets, these deals are written with 5 and 10 year balloons on 30 year amort. This is simply a futile attempt to let the accounting tail wag the market dog. There is no liquidity out there, and to the extent deals were underwritten poorly (high leverage, low coverage, lack of amort, etc.), no amount of holding to maturity is gonna help. They will still default.

January 31, 2009 5:30 PM

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Anonymous said…
Re: Dilutive?

Just a question about your allegation that the stock payout is dilutive, along with your accompanying example–

Indeed it is dilutive, in general, to increase the number of common shares outstanding.

The proper question to ask in this case is: “Is the policy dilutive _to existing shareholders_.”

One could argue ‘No.” An example:

REGULAR DIVIDEND POLICY:
*REIT has 1000 shares outstanding.
*REIT has $1000 in IRS Taxable income to distribute to shareholders as dividends (which the REIT must do, in order to meet REIT requirements).

= So the REIT pays out $1 per common share as a cash dividend.

FINANCIAL CRISIS In-Kind PAYOUT:
*REIT has $200 to distribute as dividends.
*REIT still has 1000 shares.
= so REIT has $0.20 to pay out to each shareholder.
*REIT decides to pay these in stock, rather than in cash.
*Share price is $2.00 on the day the value is determined.
= so REIT decides to pay 1/10 of a share for each 1 share held, as the dividend.
= So if you had 1 share before, you now have 1.1 shares. Total shares are now 1100.

NEXT REGULAR DIVIDEND, things back to normal:

*REIT again has $1000 to pay in dividends. They will pay in cash.
**Now, there are 1100 shares oustanding (because they paid a stock dividend before)
*So, cash dividends are now only $0.9090 per share.
**BUT, now 1 share has become 1.1 shares.
= For each 1 share you originally had, you now hold 1.1 shares.
= You receive 1.1 * $0.9090 cash dividend, for a total of $1.
= For every 1 of share you originally had prior to the stock dividend, you receive $1 in dividends.

The shareholders have not been diluted– they each have a little more shares, and receive a little less per share, *but are unchanged on a per-shareholder basis.*

I believe this illustrates how the stock dividend is NOT dilutive to original shareholders.

April 28, 2009 3:41 PM

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REIT Wrecks said…
Where is Crabs of Steel when you need him? Nowhere, that’s where. Could he be a she?

For the sake of good order, the AIMCO properties are Chimneys of Oak Creak and Burgundy Court and Woodmere Apartments. They are “lender controlled”, which presumably means they have been placed into receivership but not yet foreclosed upon.

The lender is attempting to sell them, subject to financing that would require only 3% down, 4% down and 8% down, respectively. Good luck.

At current NOI, even though occupancies are good, those prices equate to cap rates of 4.32%, 4.04% and 3.63%, based on current income, respectively. Yeah right, where do I sign? They must believe they are market makers. Good grief.

To trade, these deals need to sell at a 10 cap, at the very least, on real current income, and it would still be skinny for the buyer. Does lender the intentionally want to waste time while the tailspin deepens? This is a lassic case of hiding the OPM weenie.

Anon: Yes, this is correct and a great analysis. You accurately point out the flaw in my thinking, and that is that stock dividends will continue for more than one quarter. However, at this date, NRF is the only REIT that I know of to declare and pay a stock dividend for only one quarter. Others, including the aforementioned AIMCO, have been doing it since Q3 ’08.

REITs can be a great way to play the real estate rebound, just don’t be counting on any current income unless you are nimble enough to trade these pigs up and down by the hour.

Obviously, I love certain of them. But you need to be, shall we say, savior faire,

Cheers, REIT Wrecks

April 30, 2009 12:59 AM