As many of you may remember, Wimpy was not only a character from the
Popey 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.
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 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.
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 thier 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:
** Anthracite has signaled its intention to pay 90% of its dividends in stock, but has not yet declared such a dividend.
With these stock dividends, REITs are able to preserve
prolong the agony REIT status and cash in the hopes that the capital markets will someday become viable funding sources again. Clearly however, investors are betting that JER's ability to pay cash dividends on the IOUs they are now distributing is about as likely as the W being voted back into office.
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.
