Unofficially it began much earlier, when the burden of meeting escalating shareholder redemption requests AND payng a 6.25% dividend became too much for Hines to afford. Shareholders who were on the golf course on December 1st are forgiven for missing a 4 paragraph SEC filing, but given the time of year and the quiet nature of an 8K, it's doubtful that even registered reps were aware of the news before it was too late.
Granted, there is no easy way to shut down a monster like Hines (Hines REIT had approximately $3.5 billion under management as of Q3), and in all fairness, Hines is only required to provide a 30 day notice prior to terminating its share repurchase program. Nevertheless, shutting down its share repurchase program with almost no warning is not a good sign, and it puts many shareholders in an uncomfortably tight corner.
Now that shareholders can no longer redeem their shares, what happens if Hines cuts the dividend? Shareholders would not only be unable to sell, they would also be stuck with an illiquid investment and little or no income, possibly years to come. Indeed, Hines said that shareholders could be stuck in this predicament for at least another 6-10 years.
Unfortunately, Hines has never shown a huge amount of prudence with shareholders' money, just a willingness to spend it. Almost 50% of Hines' portfolio was purchased in 2006 and 2007, the height of the bubble, and this does not bode well for the current market value of its 63 property portfolio. Incredibly though, even as the market began to correct, Hines kept up its bubble buying pace. In 2008, while many investors were already moving to the sidelines (see below chart), Hines acquired 16 more properties, only two less than it did in 2007 and five more than it bought in all of 2006. For its troubles during these 36 months, Hines charged investors $47.1 million in acquisition and asset management fees. (Investors paid almost $10 million a month in commissions, fees and transaction-related expenses during this period.)
Fortunately, Hines had only levered the portfolio by about 57% as of September 30, 2009, and 90% of that was in the form of long-term, fixed-rate mortgages. But long-term, fixed-rate debt won't save Hines from the current economic conditions, its fee-driven acquistion spree, or the portfolio's concentrated exposure to the financial services and legal professions (16% and 15% of tenants, respectively). More than 10% of the portfolio will experience lease expirations from Q4 2009 through 2011, and many of those leases will roll over at rates which could be as much as 50% below the 2006-2007 peak. Meanwhile, the portfolio's occupancy rate had already dropped by 3% in the first nine months of 2009, and occupancy will experience even more pressure in 2010 and 2011 as those leases expire (Hines' Q3 occupany rate of 92% was 4.5% lower than Wells REIT II). This means less cash flow available for distributions.
As a consequence of these conditions, Hines announced early in Q4 that it would reduce its dividend slightly. Still, through September 30th, Hines had distributed about $55 million more in dividends than it generated in operating cash flow, and this gap will only increase as cash flows from the portfolio continue to drop. Now that Hines can no longer reach into its public offering piggy bank to make up the difference, the dividend will probably need to be cut.
With the sudden decision to close its public offering AND suspend the share repurchase program, Hines put most of this writing on the wall. After the initial flurry of confusion that followed Hines' SEC filing, Hines management issued a letter to "certain" broker dealers on December 10th, offering additional information about its decision and the condition of the portfolio. Hines simultaneously made the letter available to shareholders through yet another quiet 8K filing. The letter was in a "frequently asked questions" format, undoubtedly reflecting the high level of concern already expressed by shareholders and registered reps.
The letter began by stating unequivocally that "our highest priority is protecting the value of our shareholders’ investments". However, it ended very differently just eight paragraphs later, in answer to a question about accelerating a "liquidity event" for shareholders who are now unceremoniously stuck. The letter stated with even less equivocation that the board will not consider any such option for at least another 6-10 years, and even then that "[management will do] what is in our best interests at that time." At least shareholders will not have to wait another 6-10 years to see what that means, as it's already pretty clear that management's best interests are quite different than those of shareholders.