Hines REIT Ends Share Buybacks; Are Dividends Next?

$10 million a month in commissions, fees and transaction expenses

Hines REIT Ends Share Buybacks; Are Dividends Next?

Postby REIT Wrecks » Fri Feb 26, 2010 4:59 pm

Ater raising more than $250 million in new equity through the first three quarters of 2009, Hines announced rather abrubtly in December that it would close its public offering and terminate its shareholder redemption program as of year end. Officially, the story began on December 1st 2009, when Hines filed an 8K with the SEC notifying investors and regulators of the changes to its program.

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.)

CREsalesvolume.gif
U.S. Commercial Real Estate Sales Volume - Data: Real Capital Analytics, transaction value of $5 million or more
CREsalesvolume.gif (11.17 KiB) Viewed 22231 times

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.

Attachments
12.10.09_SEC_filing_&BD_letter.pdf
December 10 filing & broker dealer letter
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Re: Hines REIT Ends Share Repurchases; Are Dividends Next?

Postby gkc265 » Thu Mar 25, 2010 8:58 am

what are the chances Hines will cut the dividend -- 25% or 75%?? can they pull out of this?

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Re: Hines REIT Ends Share Buybacks; Are Dividends Next?

Postby REIT Wrecks » Sun May 02, 2010 6:23 pm

The chances of the dividend being cut are 110%. Portfolio occupancy has dropped by a full 5% since last year, to an average of 90%, down from an average of 95% last year. Lease turnover remains high, concentration risk in the financial services and legal sectors is still appreciable, and even worse, 75.4% of the 2009 dividend was simply a return of capital. This means that Hines is just running a big Ponzi scheme a majority of the 2009 dividend was funded simply by selling new shares - not from earnings. Now that Hines has terminated the offering, they will have to rely much more heavily on real portfolio cash flows to pay the dividend, and that cash flow is decreasing.

But there's really no need for me to do any heavy lifting on this. It's much easier just to copy the language right out of their own 10K:

Declining real estate fundamentals have had a significant negative impact on values of commercial real estate investments. This has negatively impacted the value of our real estate investments and consequently is expected to negatively impact the estimated value of our shares. We intend to continue to pay distributions to our shareholders on a quarterly basis. However, as discussed previously, in light of the current economic conditions, we expect that the level of distributions to our shareholders will decrease in future periods.


If you were one of the unfortunate many who were sold Hines REIT shares in 2009, you're forgiven - it's unlikely that any of this language managed to find its way into their 2009 marketing material...

Related Posts:

Sale And Promotion of Non-Traded REITs - FINRA Investigates

REISA Addresses Non-Traded REIT Ponzi Scheme Allegations

Hines REIT and Dividends

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Re: Hines REIT Ends Share Buybacks; Are Dividends Next?

Postby REIT Wrecks » Mon May 03, 2010 2:11 pm

Elaborating on the above point re: proceeds from new share sales, a lot of those proceeds came from the DRIP.

In 2009, Hines declared almost $130 million in distributions, but they only had to pay $62 million of that in cash - because certain shareholders elected to be paid in the form of new shares through the DRIP - instead of cash. Should any of these shareholders suddenly lose interest in this act of financial hari kari, Hines will have to make up the difference on it's own or - once again - cut the dividend. From the 2009 10K:

Given the economic environment, the overall decline in the value of most investors’ portfolios and increased liquidity needs of investors, capital raising in 2009 was very difficult and continues to present challenges in 2010. The proceeds that we receive from participants choosing to reinvest distributions in additional shares has historically been an important source of capital for us. To the extent that a material number of participants in this program choose to terminate or reduce their level of participation, our capital will be further constrained.

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Re: Hines REIT Ends Share Buybacks; Are Dividends Next?

Postby crabsofsteel » Wed May 12, 2010 11:20 am

I took a peek at whether Hines funded themselves via CMBS. I was floored. This is a massive fail waiting to happen, starting with the floating rate debt which comes due at the end of 2010, to be followed by maturing 5 year fixed rate interest-only debt in 2012. The data says that net cash flow is enough to cover mortgage payments, but that's easy when your rate is 1.238% (yes, folks that is really the rate on their floating rate debt. It is just amazing how CMBS gave free money to crackhead borrowers) or if your fixed rate loan is interest-only like theirs. I'm not as concerned as RW about the type of tenant in these office buildings as much as I am about the average 30% decline in commercial rents. Let me guess: on average, lease expirations come before commercial mortgage expirations. Ask not for whom the bell tolls ... the bell tolls for BACM 2007-4 (10% Hines exposure)

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Re: Hines REIT Ends Share Buybacks; Are Dividends Next?

Postby moneybags » Sat Apr 09, 2011 3:03 pm

and now we are here: viewtopic.php?f=9&t=134

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Re: Hines REIT Ends Share Buybacks; Are Dividends Next?

Postby Jazz555 » Sat Jan 26, 2013 2:16 am

Yeahhhhhh it may be.

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Re: Hines REIT Ends Share Buybacks; Are Dividends Next?

Postby Jazz555 » Mon Mar 11, 2013 1:19 am


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Re: Hines REIT Ends Share Buybacks; Are Dividends Next?

Postby Jazz555 » Tue Oct 21, 2014 3:10 am


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