Wednesday, December 10, 2008

Reit Preferred Stocks/BDNPRC/AUTO BAILOUT

As previously announced, Brandywine Realty, an office REIT, reduced its common stock dividend from .44 to .30 per quarter which it previously called a normalized distribution.  It declared its regular preferred stock dividends In its press release for its 3rd quarter earnings, Brandywine declared that it was aligning its common stock dividend to its "projected, normalized taxable income".  

Common stock dividend reductions or eliminations have become commonplace among REITs for the past several months.  

One reason that I have given for investing in their cumulative preferred issues is that a reduction is not permissible as long as a common dividend is being paid by the REIT.   

I am slightly under water in a recent buy of Brandywine's cumulative preferred C issue, BDNPRC. Yes, I am Chicken Now, and Proud of ITLexington Realty Preferred: LXPPRD I do expect some losses from some of my recent forays into cumulative preferred stocks issued by REITS.  I recognize the risks involved with these issues.  One or more of them could go to zero in the event of a serious and long recession.  I am however ahead for the year for this asset class and will continue to invest in it.  The recent buy of GRTPRF is up almost 100%. GRTPRF: A WALK ON THE WILD SIDE/ KTN addMARKET OBSERVATIONS: LNC, M, GE, C, GRT, GRTPRF AND LEVERAGED CLOSED END FUNDS 

I am just shooting for a 15% annualized positive return for this entire category as a group, adding dividends received to the net gains and losses from share sales. None of these issues have a maturity date which negates the possibility of capturing the difference between my cost and their $25 par value, unless the REIT elects to redeem the security.  

This is an important negative consideration for me. The only positives are the dividend yield at the currently depressed prices (e.g. 75% on my $2.9 purchase of GRTPRF, and over 20% for many others), the dividend preference rights over common shareholders and the cumulative nature of those payment rights and the preference to common shares in the event of bankruptcy. Some of the negatives, besides the lack of maturity, are the (1) tax structure of REITS which requires income to be paid as dividends to maintain the tax status which causes the companies to be in constant need of capital to fund growth; (2) secured and/or senior debt probably exists to a substantial degree and both forms have priority over preferred stock in the event of bankruptcy; and (3) a preferred shareholder has no equity interest in the business that could be beneficial in the event of an acquisition. Late Friday Buys: LNC and GXP (see 1st paragraph of post on discussion of equity interest considerations)

I have not seen any indication that the proposed bailout of GM and Chrysler will do anything to resolve the conditions that would soon lead to their bankruptcy without a  FORD appears to be in better shape and might survive without federal money. At most, the current bailout package delays the inevitable for three months or so at a cost of 15 billion.  The intent is just to kick the can down the road a few yards. There is no doubt that the auto companies are more deserving of a bailout than Citigroup and AIG. But this is not saying much because Citigroup and AIG certainly deserved to fail (I am using deserve in a moral and equitable sense) 

 I understand and sympathize with the argument that the economy is too weak now to withstand widespread job losses in the auto industry, their dealerships and parts suppliers.  

I would also have to agree with my Republican Senator Bob Corker, who I did not vote for, that nothing has been promised or done yet to address the capital and cost structures which would render these companies viable.  

The UAW is still treating the situation as if they were back in the 1950s and dealing with the highly profitable American auto companies who then had no meaningful foreign competition in the U.S. auto market.  GMAC appears to be toast.GM is already a debt heavy corporation burning cash in billion dollars piles, similar to Citi and AIG in that regard.   Chrysler is a basket case that can no longer justify its independence.  At some point, a decision needs to be made to let companies fail that deserve to fail.  But I suspect that in modern day America, failure will often be rewarded,  the consequences for failure will frequently be shifted to those who did not cause it, and the repercussions of bad decisions are not suffered by those who make them.  The auto companies and the UAW complain that they are the victims of a few months of very high gas prices and the last couple of months of dismal sales.  I have a question, if the UAW's labor demands over the years, largely assented to by the companies, and the management decisions had nothing to do with the auto companies current crisis, then why can they not survive a few bad months like other large American industrial corporations?  How many industries have job banks where a laid off worker receives up to 95% of their compensation for 1 year?

For a good discussion on labor costs, and the conservative reply UAW Workers Actually Cost the Big Three Automakers $70 an Hour

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