With the capital markets offering financing in spasmodic fits of miserly insuffiency, almost no capital intensive industry can escape the effects of this money mess. No business is more exposed to this financial firestorm more than Mortgage REITS, which make money using the 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 taste 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.

Yes, 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 dividends in stock in lieu of cash, but Rev. Proc. 2008-68 clarifies the amount of a stock a REIT can distribute and obviates the need to seek "Private Letter" rulings from Uncle Sam. In doing so, the IRS has provided a clear safe harbor for those REITs that are considering this IOU tactic to recapitalize their balance sheets. Under the Procedure, REITs now have a green light from the IRS to pay out up to 90% of their dividends in MORE stock! Yikes. I have to take even more of that stuff??

There are special rules which apply to DRIP distributions of stock, and the oddly satisfying requirement that investors who are short the stock presumably 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 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.