Do REITs have magical money trees?
July 17, 2008 7:26 AM   Subscribe

If a REIT has negative Cash Available for Distribution (CAD), how does it pay out its dividend?

I'm doing some research on a particular lodging REIT, and read an analyst report that said its dividend coverage ratio was 1.4x, which is good. But when I looked at their cash flow, they have negative CAD. How do they manage to cover the dividend?
posted by undercoverhuwaaah to Work & Money (8 answers total) 2 users marked this as a favorite
They might borrow the cash using real assets as collateral.
posted by odragul at 8:08 AM on July 17, 2008

Can you share the ticker symbol?

I don't believe CAD is a GAAP term, so it's possible that you and the analyst are working from different definitions. CAD is synonymous with Adjusted FFO, which as you can see from the definition here may include some flexibility for interpretation. The standard disclaimer about FFO and AFFO is that those measures are helpful, but will not alone give you the full picture (just as is the case with EBITDA for normal companies).
posted by mullacc at 8:27 AM on July 17, 2008

Its MHI Hospitality (MDH) - I'm getting the CAD calculation off another analyst report, but given that it's approximately negative $27 million, I don't think even the most lenient of interpretations of CAD would be able to make a negative $27 million turn into a positive 1.4 coverage.
posted by undercoverhuwaaah at 8:37 AM on July 17, 2008

Excellent question! I used to have significant exposure to REITS - back during the dot com period, absolutely nobody wanted bricks n' mortar, and it was possible to pick up current yields in many cases well over 20%. Oh the good old days

mullacc is spot on with his observation re:CAD. I certainly don't watch it and in fact FFO is generally the metric to watch.

Now this is the absolutely really crazy cool thing about REITS when their payout exceeds FFO. If they maintain the dividend (always a possibility of a cut, but boards don't like to do that and try hard not to), they'll generally (but not always) pay out of retained earnings.

Why is this so good? Because the payout in excess of FFO is considering return of capital and hence is tax free. YES. Even if you just purchased it.

When I was actively investing in REITS this was one of my screens - I used five myself for evaluating REITS, and this was always a good one to look at. I got a lot very high coupon tax free cash flow back in those days by carefully selecting a REIT.

Why don't you just call up the company and ask how they are paying the dividend, and are they intending to maintain it in view of this funding shortfall? I think that folks don't engage companies enough (that's ok, I compensate on your behalf as most firms I invest in get tired of me asking question).
posted by Mutant at 8:39 AM on July 17, 2008 [1 favorite]

undercoverhuwaaah -- are you posession of a prospectus from this company? I'm not near a bloomberg now so I can't corroborate the data you've provdied, but yahoo! screws up parametric data all the time. I certainly wouldn't trade on yahoo! data alone, and in fact would advise getting a paper prospectus, especially so once you own the company.
posted by Mutant at 8:46 AM on July 17, 2008

I am not in possession of a prospectus. In fact, I'm not really looking to invest in it. The project started out as trying to justify brick-and-mortar cap rates based on yields from REITs, and since I didn't really know much about REITs to begin with, I started going a bit more in-depth, and this particular issue struck me as odd. But thanks for your insight, and I'll certainly be utilizing several of the links and thoughts in your profile as I go forward!
posted by undercoverhuwaaah at 9:20 AM on July 17, 2008

Ok, I took a brief look at MDH via my brokerage account. I can see some differences in the balance sheet between what yahoo! is presenting and what my brokers research is showing. Asset side is fine, but there are differences on the liabilities side of the balance sheet
 	2007	2006	2005	
Long-Term Liabilities
Liabilities - Total 	100.084 	64.580 	53.364
Also on the Income Statement there are differences - EBITA for example
Supplemental 2007	2006	2005
Earnings Before Interest & Taxes 	8.860 	9.777 	7.051
A few other things I've noticed - institutional investors seem to be lightening up their holdings, nothing significant, but I'd certainly ask the company what their view is, especially so (and perhaps you've noticed this already) analyst forecast of the dividend going forward are downright bullish for the dividend
Jun 2008	Sep 2008	Dec 2008	Dec 2009
Consensus EPS Estimate  	.12  	.07  	.26  	.34
But that's all an aside since you're looking to invest in it. Yahoo! doesn't seem wildly off base here - I've seen them get really out of whack with reality before - but they do disagree with my broker which means you've got two, divergent data points.

Interesting company though - too bad I'm not investing in REITS anymore.

HTH - take care
posted by Mutant at 9:21 AM on July 17, 2008

Unfortunately, I don't have access to the boutique research firms that cover this stock--are you able to break down the calculation which arrives at -$27 million?

On an FFO basis, MDH didn't cover their Q1 dividend ($0.07/share FFO, $0.17/share div). But in 2007 and over the LTM ended 3/31, they did cover it (2007: FFO $0.87 Div $0.68; LTM: $0.74 Div $0.68). MDH lists analyst estimates of future FFO/AFFO on its website, and those estimates imply full coverage assuming they hold steady at a $0.17/share quarterly dividend.

Digging into their filings, I see that LTM FFO was $7.9 million. Getting to an AFFO of ($27MM) is a ($35MM) swing. From what I understand--and note that REITs aren't my coverage area--under some definitions of AFFO, you subtract maintenance capital expenditures from FFO to get to AFFO. MDH has spent quite a bit on CapEx over the last twelve months: LTM CapEx was $41.3MM. Of that amount, $13.8MM was for property acquisitions and $27.4MM for improvements. I would guess that your analyst is taking a big chunk of that CapEx out of AFFO. Which leads us back to odragul's comment right out of the gate--they're borrowing money. Cash flow from financing was $28.4MM over the LTM period. At 3/31, they had an $80MM credit line with $46MM drawn, so there's some availability remaining there.

This is what I've gathered from their last 10Q and 10K. You'll have to come to your own conclusions since I'm not your advisor and I'm neglecting the work I'm supposed to be doing.
posted by mullacc at 9:45 AM on July 17, 2008

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