Reits now give more stocks, less cash, as dividend

Source : Business Times - 3 Feb 2009

The credit crisis is claiming yet another victim: the hefty cash dividend that has lured investors to real estate investment trusts (Reits).

With sources of lending drying up, the owners of shopping malls, apartment buildings, office complexes and hotels are hoarding cash by paying large portions of their dividends in stock.

Reits, such as Simon Property Group Inc and Vornado Realty Trust, have traditionally attracted investors because they offer big cash dividends, distributing 90 per cent of their taxable income to shareholders.

But the credit crunch and uncertain economic times are changing that. Since May, the boards of 41 Reits have voted to either suspend or cut their cash dividends, according to research firm SNL Financial.

Simon Property, the largest US mall owner, became the most recent Reit to change the composition of its quarterly dividend.

It said on Friday it would pay its quarterly dividend 90 per cent in stock, instead of all cash, a decision allowing it to retain US$925 million of cash in 2009.

‘Right now we just want to be a little bit extra cautious, or maybe a lot more extra cautious when you’re talking about maintaining another US$900 million of cash,’ chairman and chief executive David Simon told a conference call.

Vornado, an owner of high-end office buildings, said on Jan 14 it would pay 60 per cent of its dividend in stock, allowing it to retain US$390 million. Its previous dividend was all cash.

A Reit’s cash dividend used to be sacrosanct and some have even borrowed in the past to pay rather than cut it.

Still, many investors would rather a company trim the dividend than issue more stock at depressed prices.

‘I question the issuance of stock in lieu of cash because at these valuation levels, it’s really dilutive to issue at these low prices,’ said Richard Imperiale, author of Getting Started in Real Estate Investment Trusts and president of Forward Uniplan Advisors. ‘It seems to me that the rationale behind doing it is - because you can.’

But the extra cash also may enable a Reit, such as Simon Property, to act quickly and decisively to acquire property, especially under current credit constraints when loans may be expensive, small and take more time to secure.

‘That’s in the back of our minds,’ Mr David Simon said.

The US Internal Revenue Service (IRS) exempts a property company from corporate-level income taxes if the company distributes at least 90 per cent of its taxable income to shareholders.

The IRS allows the company to pay up to 90 per cent of the dividend in the form of stock.

‘From a cash management standpoint, I think it’s good for companies to keep an eye on every piece of cash and be shepherding capital as well as they can,’ said Joseph Betlej, portfolio manager at Advantus Capital Management.

‘But from the perspective of the Reit industry, there’re a lot of investors that care about that dividend,’ he added, ‘and the idea that we’re going to be paying these things now in stock lessens the attractiveness of Reits to the investing public, both retail and institutional investors.’

Many retail investors hold Reit stocks for the quarterly cash flow from the dividends.

‘If you lower that, they understand what they’re dealing with, a reduced level of income,’ said Mr Imperiale. ‘If you issue stock in lieu of cash, not only do they sell the stock you issued to them, they also sell the stock they own.’