REIT Wrecks » JER http://gdmig-reitwrecks.com High Yield REITs And Commercial Real Estate Thu, 28 Apr 2016 02:18:47 +0000 en-US hourly 1 https://wordpress.org/?v=4.2.30 Warning: These REITs Still Pay Dividends, But Not In Cash http://gdmig-reitwrecks.com/2009/01/warning-these-reits-still-pay-dividends.html http://gdmig-reitwrecks.com/2009/01/warning-these-reits-still-pay-dividends.html#comments Mon, 19 Jan 2009 11:09:00 +0000 http://reitwrecks.com/wordpress/?p=196

“I’ll gladly pay you Tuesday for a hamburger today.”

Wimpy, character from the cartoon series Popeye

As many of you may remember, Wimpy was not only a character from the Popeye cartoon series, he was also a glutton for hamburgers, and he would consume them at a ferocious rate. Of course, “Tuesday” would never come, and Wimpy constantly secured himself a free lunch.

These days, REITs are increasingly turning to a Wimpy-esque self-preservation strategy, “borrowing” cash from shareholders without any real intention of ever paying it back. How are they doing this? Simple. because they have to Instead of paying dividends in cash, they are electing to pay out dividends in stock [Please click here for an updated list of REITs paying dividends in stock].

Presumably these new shares will someday tuesday? pay out cash dividends, but for some struggling REITs that day may never come. Adding insult to injury, shareholders will need to raise cash to pay income tax on the dubious value of the stock they receive.

2009: The Year of the Stock Dividend

However, numerous REITs really have no choice but to turn to this dilutive dividend strategy to recapitalize their balance sheets and conserve cash, and many more REITs will be forced to make this declaration in 2009. Indeed, two more REITs made it official last week.

On Wednesday, Vornado Realty Trust (VNO) joined the list, declaring a $.95 dividend for the quarter, but only 40% will be paid in cash. The rest will be paid in the form of more common stock, as if shareholders didn’t already have enough of the stuff. And there’s no need to push the “buy” button here folks, it’s practically automatic. talk about a DRIP

Not surprisingly, VNO’s already underwater shareholders quickly signaled their lack of enthusiasm for this financial version of Chinese water torture, selling the stock off by $2.28, or 4.5%, after the news was announced. The stock is down significantly from its 52 week high of $108.15.

Vornado Realty Trust Stock Chart

Meanwhile, Sunstone Hotel (SHO) announced that its dividend will consist of approximately $7.3 million in cash and about 5 million shares of the company’s common stock. This amounts to about 80% of the dividend.

The IRS Says Do Not Pass Go; Do Not Collect $200

All this monkey business has been sanctioned by the IRS, which recently issued Revenue Procedure 2008-68. Rev Proc 2008-68 clarifies the circumstances under which REITs may issue stock dividends and still maintain their REIT status, and it provides a clear safe harbor for those REITs that are considering this IOU tactic. Click here for the full text of Revenue Procedure 2008-68.

With the new IRS guidance, REITs now have a green light from the IRS to pay out up to 90% of their dividends in stock. I first wrote about this IRS-sanctioned funding strategy in the post Dilutive Divends: Coming Soon to a REIT Near You! For background on requirement for REITS to pay out 90% of their taxable income to shareholders, see the post REIT Definition. Expect the list to grow longer, but for now REITs paying out dividends in stock include the following:


REITs Paying Dividends In Stock

Prices & Yields Updated Daily at the Close
REIT Name Sector Last Price Change Yield % Paid in Stock Quotes/News
AIMCO Apartment REIT $4.36 +0.21 9.30% 75% AIV
Anthracite Capital Mortgage REIT $4.36 +0.21 9.30% 90%** AHR

CBL & Associates

 Retail REIT $4.36 +0.21 9.30% 90%** CBL
Developer’s Diversified Realty Retail REIT $4.36 +0.21 9.30% 90% DDR
Diamond Rock Hospitality Hotel REIT $4.36 +0.21 9.30% 60-90%** DRH
Hospitality Properties Trust Hotel REIT $4.36 +0.21 9.30% TBA** HPT
JER Investors Trust Mortgage REIT $.32 +0.00 Eliminated Previous 90% JERT.OB
Lexington Realty Trust Diversified REIT $4.36 +0.21 9.30% 10%** LXP
Macerich Retail REIT $4.36 +0.21 9.30% 90% MAC
Northstar Realty Finance Mortgage REIT $4.36 +0.21 9.30% 60%** NRF
One Liberty Properties Diversified REIT (NNN) $4.36 +0.21 9.30% 90% OLP
RAIT Financial Mortgage REIT $4.36 +0.21 9.30% 90%** RAS
Simon Property Group Retail REIT $4.36 +0.21 9.30% 80% SPG
Sunstone Hotels Hotel REIT $4.36 +0.21 9.30% 90% SHO
UDR Apartment REIT $4.36 +0.21 9.30% 75% UDR
Vornado Realty Trust Office & Retail REIT $4.36 +0.21 9.30% 60% VNO

** Anthracite has signaled its intention to pay 90% of its dividends in stock (it is unclear what effect AHRs recent settlement with its secured/unsecured lenders will have on this), but has not yet declared such a dividend. Diamond Rock and RAIT Financial have done the same, but the splits remain unclear. Northstar paid a 60% stock dividend in Q4, but paid an all cash dividend in Q1. in Q1 2009, LXP reduced the amount of dividends paid in stock from 90% to 10%, but at the same time they cut their dividend by 45% . HPT eliminated its dividend in Q1 but said it intends to pay a dividend in Q4, and that it may include both cash and stock. CBL announced in Q1 that it would resume its cash dividend in Q2.

With these stock dividends, Real Esate Investment Trusts are able to preserve prolong the agony REIT status and cash by issuing I.O.Us just like Wimpy. In the meantime, they are hoping that the capital markets will become viable funding sources again and that making REIT investments will no longer be considered financial hari-kari.

For now, being fed a stock dividend may be even worse than an IOU, because all it represents in the short term is a tax liability with no cash. Unfortunately, I can’t imagine any capital-starved REIT not electing to take advantage of this revenue ruling (at least to some extent). Undoubtedly, this will further erode confidence in the sector and prolong the recovery in REITs.

REIT Dividends

Update: I recently moved to a new software platform and server location. The original 18 comments to this post did not automatically port over to the new location, so I have uploaded them in bulk, unedited under my name, in the one comment below.

Disclosures: None at the time of publication
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]]> http://gdmig-reitwrecks.com/2009/01/warning-these-reits-still-pay-dividends.html/feed 3 Dilutive Dividends: Coming to a REIT Near You! http://gdmig-reitwrecks.com/2008/12/dilutive-dividends-coming-to-reit-near.html http://gdmig-reitwrecks.com/2008/12/dilutive-dividends-coming-to-reit-near.html#comments Fri, 19 Dec 2008 17:48:00 +0000 http://reitwrecks.com/wordpress/?p=167

With the capital markets offering financing in spasmodic fits of miserly insufficience, almost no capital intensive industry can escape the effects of this money mess. Few businesses are more exposed to the financial firestorm more than Mortgage REITS, which make money with old fashioned spread lending. They borrow at 5%, lend the proceeds out at 7% and pocket the difference, assuming their miscreant borrowers manage to pony up each month. But now that these REITs are unable to borrow and basically out of cash, how are they going to make it through next quarter, never mind survive?

JER Investor’s Trust (JER) offered a glimpse of the future yesterday. To my knowledge, they are the first REIT to fulfill the IRS minimum dividend requirement with stock (see “REIT Definition” for more on this) since the credit crisis began.

No, that is not a typo – JER paid their dividend with stock, not cash, and they were not wasting any time. The IRS issued Revenue Procedure 2008-68 just last week on this issue, and it provides temporary guidance to cash strapped REITs considering this cash preservation tactic (as well as an indication of the number of inquiries they have been fielding on the topic).

REITs have always had the ability to issue stock dividends in lieu of cash, but Rev. Proc. 2008-68 clarifies the amount of stock a REIT can distribute and obviates the need to seek “Private Letter” rulings from Uncle Sam. By issuing Rev. Proc 2008-68, the IRS has provided a clear safe harbor for those REITs that are considering this IOU tactic to recapitalize their balance sheets. With the new guidance, REITs now have a green light from the IRS to pay out up to 90% of their dividends in MORE stock! Yikes. You mean I have to take even more of that stuff??

There are special rules which apply to DRIP distributions of stock, and the oxymoronic requirement that investors who are short the stock presumably will now need to buy it in order to meet the dividend owed to their counterparty.

There are other cash preservation strategies available to cash strapped REITs, but with this Rev. Proc., there are none more appealing than issuing even more useless scrip. These strategies include decreasing the amount of dividend distributions (yep, next…) or deferring the timing of dividend payments. There is also the dreaded “cashless consent”, but it is of no practical use to a public REIT as it requires unanimous shareholder approval. (Shareholders must include the amount of the cashless consent “dividend” in their taxable income.)

JER’s election to pay dividends in the form of stock is currently the only viable way to raise capital. And whether they like it or not, JER is now effectively selling common stock each quarter to shareholders who are undoubtedly choking to death on what they already have.

This is also an indication of JER’s level of pessimism for 2009. Underscoring that gloom, Credit Suisse is expected to take a hatchet to its commercial mortgage staff this month Happy Holidays! leaving only a skeleton crew in New York. Those expected to be departing soon are all of its originators (loan officers), both at Credit Suisse and at their CMBS loan origination subsidiary, Column Financial. This means that Credit Suisse has basically written off CMBS as a viable business in 2009. Morgan Stanley has also made deep cuts in its real estate group.

Thus, preserving cash is really the only prudent strategy for JER, and it probably is the only practical way out of this mess for other capital-starved REITs. The net effect of the IRS guidance is that is now easier than ever for REITs to issue stock in lieu of cash, and 2009 will definitely be the year of the stock dividend. If you were counting on that cash to pay your rent, you had better look elsewhere. Click here for an updated list of REIT dividends paid in stock.

REIT list

Disclosures: None at the time of publication
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