REIT Dividend Requirements and ProLogis
REITs are a somewhat complicated security to analyze because of the special dividend requirements in relation to taxable income. According to NAREIT:
REITs are required to distribute at least 90% of their taxable income to their shareholders pursuant to § 857 of the Code and must pay tax on any taxable income that they do not distribute. Specifically, the REIT’s deduction for dividends paid must equal or exceed 90% of its taxable income, after certain adjustments not relevant here. C corporations have no such distribution requirement.
Basically, they have to pass through most of their taxable profits regularly in the form of dividends. Others have used this misunderstood requirement to assert that ProLogis is paying a high dividend out of some sort of mandate. That is NOT the case.
On the call and according to the transcript at SeekingAlpha, Bill Sullivan, seemed to confirmed that the dividend is in EXCESS of the requirement when he said, in reference to dividend coverage:
And so we are in no way, shape, or form, at the level of taxable income that requires us to distribute anywhere near that but we’re comfortable with our dividend.
The actual rule requires a minimum dividend payout floor (not a dividend ceiling). Thus, it does not make sense that Sullivan was implying that the dividend did not meet the minimum requirement. PLD would be in violation of the REIT requirement if that was the case. Therefore, he must have been saying that the dividends are in excess of the requirement.
The ridiculous thing is, he said it with pride…like it was a good thing.
November 9th, 2008 at 10:39 am
Richard:
I have reviewed your information and want to congratulate you for the heads up you are providing people. I came across ProLogis pricing when reviewing the S&P components sorted by yield. I was of course blown away by what is going on with the stock. I have a few observations based on my review of their latest 10q dated June 30. My biggest concern would be undisclosed liablities that do not show up on the balance sheet. One item that gets my attention is the unconsolidated entities that are accounted for using the equity method. If PLD has guaranteed any debt of these companies then we would have an Enron situation on our hands but I have not found any evidence of that so far. I also checked out the cost of the real estate on their books and it looks like it is about $50 PSF which is higher than you would like in this market but not outrageous. So my objective is to determine how low can the stock price go or what is a good price for the stock. As of Sept the book value of stock is about $28. Writing off their entire investment in unconsolidated investments would reduce the book value down another $10 to $18. The last write down would be the value of the real estate owned which as I said earlier is about $50 PSF. You could knock off $10 to get it down to $40 and that would take the book value down another $7.80 or for rounding purposes let’s say $8. So after all that you are at a little above $10 a share. Does the company have adequate liquidity? I do not know but if it does I gotta believe this stock is worth $10 a share especially if it has adequate liquidity for the dividend. Just think on November 26 they are going to pay out over .50 cents a share. I am not a shareholder now but if I can buy the stock at 10 sell a Nov call and get a buck and receive a dividend of 50 cents which will give me a basis of $8.50 I think I am fairly comfortable. What do you think. By the way I am also in the real estate business for over 20 years and a CPA.
Give me your thoughts.
Gary