Wednesday, June 30, 2010

Hines Distribution Cut
The news that Hines REIT is cutting its distribution is rippling through the broker / dealer community this morning.  Hines is dropping the annualized rate to 5% from 6%.  This is not a huge cut in the whole scheme of non-traded REIT distribution cuts.  Here is text from an email sent to broker / dealers today and the 8-K filed that was filed with the SEC:
The Hines REIT Board of Directors and management team has elected to reduce the dividend on the Hines REIT from 6% to 5% beginning July 1st.  Our management and board of directors believe that aligning our distributions with funds generated by our operations, including the results of certain property sales, and not with funds from offering proceeds or borrowings, is an important objective for the Company. We are proud that, other than our initial quarters of operations, we have been able to meet that objective.

Our portfolio continues to be well leased overall at 90%; however, given the economic environment, we have experienced a decline in occupancy and rental rates over the last few quarters, which have reduced our net operating income as we re-lease expiring space to new or existing tenants. Unfortunately, the downward trends in real estate fundamentals may continue for several more quarters before they begin improving, and the rebound may be slow. As a result of these market conditions, our board of directors has decided to reduce our current annual distribution rate from 6% to 5% (based on our last share price of $10.08 per share)* effective for the quarter beginning July 1, 2010, in order to maintain our practice of aligning distributions with our operating performance as described above. The reduction is not the result of liquidity needs such as debt maturities or pay downs or capital expenditure requirements of our properties. In fact, our liquidity position is quite solid and we have relatively low levels of debt maturities in the next 24 months. The reduction simply better aligns our distributions with our forecasted operating performance over the near term.
The language above sounds prudent, but the Hines REIT's second quarter 10-Q is now a must-read (the excitement is palpable) to look behind the spin.  Bear in mind that Hines REIT stopped its share repurchase plan late last year, albeit the REIT's liquidity was the typical non-traded REIT limited liquidity.  Hines REIT also has the distinguishing feature of not having a set liquidity plan, such as a time frame to sell assets or list shares on an exchange.  Investors are going to have to learn to live with the REIT's 5% yield, or whatever yield they can get.  I guess my bigger question is given the declining distribution rate and Hines' statement on declining occupancy and lease rates, how valid is Hines REIT's Net Asset Valuation of $10.08 per share? 

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