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Real estate trusts taking the cash out of their dividends

Posted by: Aaron Pressman on March 18, 2009

I don’t have to tell you that 2009 has been a horrible year for real estate investment trusts — and we’re only in mid-March. The SPDR Dow Jones Wilshire REIT exchange-traded fund (Symbol: RWR) is off 31% this year and a whopping 60% over the past 12 months. That’s pushed the trailing one-year dividend yield over 11%, or a historically huge margin of 8 percentage points more than the yield of the 10-year U.S. Treasury bond. And that’s got some people sniffing around looking for bargains.

But beware: some of those fat dividends are less than meets the eye. A growing number of REITs are turning to one of the less-welcome strategies of the leveraged buyout crowd. Instead of paying dividends in cash, they’re paying with more shares of stock. That dilutes the ownership of stake of existing shareholders and ultimately waters down the value of future dividends. And shareholders still have to pay tax on the full value of the dividend just like they did when it was actual cash. The move also conserves cash for REITs in the present credit-constricted environment, of course.

Mall owner Simon Property Group (SPG) was the latest to announce a so-called pay in kind strategy. The company said that despite an election among shareholders, who overwhelmingly wanted cash, its upcoming 90 cents a share dividend would consist of about 9 cents a share of actual money plus 81 cents worth of stock. The REITWrecks blog, written by an anonymous former Wall Street financier, has been tracking the trend and lists another half-dozen trusts opting to pay in kind.

Another danger for the REIT sector is the possible bankruptcy of another mall giant, General Growth Properties (GGP). Standard & Poor’s lowered its ratings on some of the company’s debt to the lowest possible level of “default.” Hedge fund manager William Ackman, who bought up a huge chunk on General Growth shares, told Bloomberg, that selling off the company’s properties in bankruptcy would “take down the entire REIT industry,” without providing much explanation. Presumably, a fire sale of malls at depressed prices would prompt investors to mark down their views of the value of properties across the industry. Ackerman wants a more orderly reorganization — one that doesn’t wipe out the value of his equity investment.

So if not now, then when? What signs are you looking for that it’s safe to return to the REIT sector?

Reader Comments

The Mad Hedge Fund Trader, San Francisco, CA

March 20, 2009 2:36 PM

I am more convinced than ever that real estate has another 25% to fall, and best case, it is dead money for another five to ten years. The New York Times produced some insightful data on inflation adjusted home prices for the last 120 years, which baselines at a $100,000 for a single family home in 1890. Few people realize how superheated the recent real estate bubble really got. Past bubbles very consistently peaked at $125,000 in 1896, 1979, and 1989. This last one peaked at $205,000 in 2005, almost double the previous record highs. And while we have dropped 34% since then, to $135,000, we haven’t even fallen to the past all time highs yet. If you look at historical lows, my call for a further 25% slump looks positively bullish. We saw lows consistently around $66,000 in 1920, 1932, and 1942. Postwar lows came in at $105,000 in 1976, 1983, and 1996. These figures suggest the best case low is down a further 28%, and the worst case is down another 51%. I think I’ll go find something else to trade.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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