Stripnomics

ACC pays a handsome dividend in comparison with its earnings… a bit too handsome. It is Suspect.

Since ACC is a REIT, many will assume that it pays its dividend strictly in compliance with the requirement that REITs pay 90% of taxable income to shareholders. I do not think that is the case. I think the dividend is OVERPAID. (You can read about the tax requirements at NAREIT.)

Here is a screen grab showing ACC’s dividend and the yield as of January 19th:

So the question is:

DOES THE DIVIDEND PAYMENT TRULY REFLECT 90% OF TAXABLE INCOME?

We don’t have copies of ACC’s tax returns so we have to play with the data we have. We can do this in several ways. 

The first giveaway that something is not right is that the dividend amount is grossly disproportionate to EPS. While there can certainly be divergence between EPS and net taxable income, I would not expect taxable income to be 100 times larger. Accountants do not work to overstate taxable income, they try to understate it. For comparison, here are a few screen grabs of tried and true companies showing their dividends and EPS:

Notice that in each case, EPS is higher than the dividend. That’s because these companies can afford to pay the dividend without financing.

Another way we can figure out whether this is a fair dividend in light of taxable income is by the 10Q. The 10Q’s are much more detailed than any of the quick statistics available on the net. According to ACC’s Cash Flow Statement from the most recent 10Q, for the 9-month period ending September 30, 2008, the company had an Income Tax provision of $248,000 for the period and total distributions to common and restricted shareholdes of $36.254M.  If we assume that this $248,000 tax provision applies to the 10% of net income that is not distributed to shareholders and they withold at a 38% corporate tax rate, we can interpolate that 10% of net taxable income is equal to:

$248,000 ÷ .38 = $652,000

We can multiply this value by 10 to try and get a measure of the total net taxable income for the enterprise, which gives us a number of $6.52M. Obviously, this is nowhere close to the $36.354M in dividends paid per the Cash Flow Statement.

Finally, we can simply look at the Cash Flow Statement from the recent 10Q (for 9-months) and compare the “Net Cash Provided by Operating Activities” (Cash Profits) with “Distributions to Common and Restricted Shareholders” (Dividends).

Cash Profits	Dividends
$22,960,000	$36,254,000

As you can see, Dividends are more than Cash Profits.  I am now confident that this dividend is way too high. This begs a whole different set of questions?

How can this be justified by any common sense measure? How can the management of this company set the dividend this high according to reasonable business standards? Is this an example of stupidity or genius?

I will leave those questions to the powers that be. In the meantime, I will profit from the knowledge that I am not the sucker.

SO HOW DO THEY PAY THE DIVIDEND IF THEY DON’T HAVE THE INCOME TO SUPPORT IT?

Well, they do it the same way ProLogis and many of the other overleveraged REITs do it: the BORROW! That’s the mentality of these REITs - borrow and speculate on price appreciation!

Returning to the Cash Flow Statement for the last 9 month period, ACC had a mere $23M from Operating Activities (that includes rents and development fees). The company had a whopping $416M in cash flows from Financing Activities and spent $413M on property acquisitions (particularly the GMH purchase). Most of the financing was provided through the sale of common stock - $264.5M to be exact.

Now do you see why they keep the dividend high? It’s a lot more difficult to sell common stock (which diluted shareholder value by the way) if you pay dividends comensurate with crappy profits.

Too bad for the common shareholders that the senior debt holders are all too willing to let this continue. Why not… suckers turnover cash to the company in exchange for low priority common stock and the banks keep getting their interest payments. If anything ever goes wrong, the banks will just get the assets and leave the rest to the unsecured creditors to pick over. The common shareholders get even less. Leftovers are not plentiful for common stockholders when secured real property is the main asset class. Read my post titled “What Happens in Bankruptcy” for a clear understanding of shareholders place in the food chain.

How do I know the banks are complicit in allowing increases to the dividend? I read the Exhibits to the 10Q of course. These are the long boring documents filled with that special code we lawyers communicate to each other in. Exhibits to 10Q’s are almost always consummate examples of ”the fine print”.

Exhibits 10.1 and 10.2 to the recent 10Q were, respectively, the “Second Amendment to the First Amended and Restated Credit Agreement” and the “First Amendment to the Senior Secured Term Loan Agreement.”  Although they were two documents, the effects were the same thing on two different loans. Here is the pertinent language from exhibit 10.1:

“2.   Modification of the Loan Agreement. Borrower, the Lenders and Administrative Agent do hereby modify and amend the Loan Agreement as follows:
 
  (a)          By deleting subsection (i) of Section 5.02(g) of the Loan Agreement in its entirety and inserting in lieu thereof the following:  “(i) no Default or Event of Default shall have occurred and be continuing at the time of declaration or payment thereof and the aggregate amount of such Cash dividends or distributions, together with the aggregate amount of Cash dividends or distributions made during the applicable period pursuant to the immediately following clause (ii), (A) do not exceed 115% of Funds From Operations for the current four fiscal quarter periods of Parent Guarantor ending September 30, 2008 and December 31, 2008, (B) do not exceed 110% of Funds From Operations for the current four fiscal quarter period of Parent Guarantor ending March 31, 2009, (C) do not exceed 100% of Funds from Operations during any other four consecutive fiscal quarters of the Parent Guarantor thereafter, and (D) do not exceed 100% of Funds From Operations during any one fiscal quarter for the fiscal quarters of the Parent Guarantor ending on December 31, 2008 and March 31, 2009,”

So what does all of that legal mumbo jumbo mean? If you figure it out you might be able to capitalize. Otherwise, stay tuned on this channel for Part II… coming soon.

This entry was posted on Tuesday, January 20th, 2009 at 12:58 pm and is filed under Accounting, Economics, Law, Real Estate, Trading. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.