Lightstone REIT Cuts Dividend; SEC Involved But Role Unclear

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Lightstone REIT Cuts Dividend; SEC Involved But Role Unclear

Post by REIT Wrecks » Sun Aug 15, 2010 4:12 pm

Just a few weeks after I wrote my first post on Lightstone Value Plus REIT I ("[url=]Watch Out, Lightstone REIT is Trailing Smoke[/url]"), the REIT suspended its shareholder redemption program. My second post on Lightstone ([url=]Lightstone REIT Implodes; Let's Go to the Audiotape![/url]) came late in June, and just about two weeks after that Steve Hamrick, the president of the REIT, suddenly resigned. Two weeks after that, Lightstone announced that the second quarter dividend would be cut almost in half, from 7% to 4%. What on earth is going on here?

Had they been invited to listen to the Q1 conference call, investors might have been surprised by the dividend cut. At that time Hamrick said there was "good insulation" on the dividend, but he also said "this has not always been the case."
Lightstone Finds A Way With Non GAAP MFFO .mp3
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So how can Lightstone go from having "good insulation" on its 7% annualized dividend in the first quarter, to zero in the second? The reason is that just as Hamrick stated, Lightstone Value Plus REIT has been a laggard on dividend coverage for its entire life. In fact, Lightstone has been busy paying dividends with offering proceeds, not earnings, since the start. In 2007 and 2008 alone, Lightstone reported that 53% and 54% of the dividend, respectively, had been paid using cash from new stock sales - not cash flow from the portfolio. If you're not sure why this is important, [url=]this is what happens when you pay dividends without earnings[/url].

Not only did Hamrick acknowledge that Lightstone pays dividends without earnings, he also admitted that it comes at the expense of their own investors, while calling it "appropriate and even necessary" to sell the shares! ([url=]listen to the call here[/url]) Nowhere except the upside down world of Non-Traded REITs would this sham be considered appropriate and necessary, and once again, shareholders are left paying the price for one of the most ugly aspects of the Non-Traded REIT sales pitch: reliable income that's actually not income at all.

So why did Lightstone cut the "dividend"? Sadly, Lightsone's public 8K did not shed much light on that important question. Rather than provide an explanation for the cut (I mean, who cares, you can't sell anyway...), the 8K actually implied that investors would soon have reason to celebrate!
At this time, our Board of Directors has decided to temporarily lower the distribution rate until the closing of the previously announced disposition of our investments in certain retail outlet centers (“the Disposition”). Additionally, the Board has decided to meet as soon as a closing date for the Disposition is set (the “Closing Date”) with the intention of declaring an additional distribution equal to 4% annualized rate, payable around the Closing Date. This will bring the distribution for the three months ended June 30, 2010 to a grand total of an 8% annualized rate, which is an increase over the prior quarterly distributions of an annualized rate of 7%.
If you can ignore the cheerleading in the 8K, it's pretty obvious that Lightstone REIT I is simply running out of cash, and that's why they had to cut the dividend. And when the Prime sale closes, Lightstone will start the whole process over again - take shareholder capital and send it right back, anesthetize shareholders and their advisors by calling this return of capital a dividend, take a second full bite at the ridiculously high 2.75% acquisition fee, and pull another $30 million out of the REIT in the process (assuming 75% leverage). Then rinse, wash and repeat!

Significantly, the 8K also disclosed that Lightstone was still in the process of updating its registration statement with the SEC, and that the registration had not yet been declared effective by the SEC. Put another way, this means that the SEC is not allowing Lightstone to sell any additional shares, and to the extent that's true, this is a very big deal. Lightstone has been funding a significant portion of the dividend with proceeds from the DRIP, but without proceeds from the DRIP, the dividend emperor has no clothes. Why Lightstone didn't elaborate on this in their 8K is unclear, but Question #3 in the FAQ section of the below memo seems to expose the real reason for the dividend cut, and it also shows that Lightstone was in communication with the SEC up until the very last moment, trying in vain to get approval so they wouldn't have to cut it:
Whoops!  We Were Just Kidding About That 7 Percent.jpg
Whoops! We Were Just Kidding About That 7 Percent.jpg (299.33 KiB) Viewed 13268 times
So, the real question is not why did Lightstone cut the dividend, but why didn't the SEC approve Lightstone's registration statement? And why didn't Lightstone elaborate on this in the 8K? Even Lightstone says that this is normally an "automatic process" (see page two of the memo, first full paragraph). So, if the process is normally "automatic" why is it no longer automatic for Lightstone? Is Lightstone under SEC scrutiny? Why did Hamrick suddenly resign without explanation? How exactly will cash flow from operations/MFFO support an 8% annualized dividend next quarter, if they can't support a 7% annualized dividend this quarter? Furthermore, if a 7% dividend "would have been prudent" with the DRIP, why is it imprudent without the DRIP? And what does the new president, Peyton Owen, have to say about all this? Stay tuned, because this story is going to get a whole lot more interesting.

Related Posts:

[url=]Lightstone REIT Implodes; Let's Go to the Audiotape![/url]

[url=]Watch out! Lightstone REIT is Trailing Smoke[/url]

[url=]Sale and Promotion of Non-Traded REITs - FINRA Investigates[/url]

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