Warning: These REITs Still Pay Dividends, But Not In Cash

“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.

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.

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
apartment reits, hotel reits, office reits, mortgage reits
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