Here's a Big Company Bailout by the Taxpayer That Even the Taxpayer's Missed!

Reggie Middleton's picture

Riddle me this. An industry gets into trouble due to chasing fads, loading up on debt and overpaying for property. Many participants in said industry flirt with insolvency due to difficulty meeting debt service and asset values that have dropped below liabilities. This industry has been gifted with a special tax provision that allows them to pay no corporate taxes as long as they pay out 90% of their income to their shareholders. By now I am sure you have guessed the industry, but let's move on .

After special meetings with the IRS, who were told that the world would end if these entities were forced to dump distressed real estate onto an already distressed market (in reality, commercial real estate prices will simply return to fundamentally supportable prices), these companies were given a special reprieve on top of their already gifted special reprieve that allows them to pay said dividends in stock rather than cash.

The need to conserve cash, as explained above, stems directly and primarily from imprudently participating in bubble binging, and from a tertiary perspective, the dwindling refinancing market - of which would not be such a big deal if companies didn't overpay for, and overleverage properties in the first place. The solution? Team up with the Wall Street banks that gave you the imprudent loans that most should have known couldn't be paid back in an effort to shift the losses to the retail investor. This is a win -win situation for the banks that made the loans as well as for the REITs that took the loans. Here is the playbook (for illustrative purposes only, of course):

Step #1: Pump the stock - Reference the upgrades, and notice they happen to occur right before a secondary offering - From ZeroHedge: Merrill Lynch In Full REIT Upgrade Mode - The Sequel. Notice that the upgrades are made despite the fact that the CRE market is in total shambles with no near to medium term improvement in sight.

Step #2: Dump the stock: Again from ZeroHedge: Bank Of America Merrill Lynch Gets Paid To Pay Itself Back In Developers Diversified.

Today, Developers Diversified Realty announced it was issuing $300 million in senior notes, with lead underwriter "BofA Merrill Lynch"...

We intend to use the net proceeds of this offering to repay debt, including, without limitation, one or more of:

•· Borrowings under our $1.25 billion unsecured revolving credit facility maturing June 29, 2010 (with a one-year extension at our option subject to the satisfaction or waiver of customary closing conditions); as of June 30, 2009, total borrowings under our $1.25 billion unsecured revolving credit facility aggregated $1,169.5 million with a weighted average interest rate of 1.5%;

•· Borrowings under our $75 million unsecured revolving credit facility maturing June 29, 2010 (with a one-year extension at our option subject to the satisfaction or waiver of customary closing conditions); as of June 30, 2009, there were no amounts outstanding under our $75 million unsecured revolving credit facility;

•· A portion of our 4.625% Senior Notes due August 1, 2010; as of June 30, 2009, there was approximately $260.8 million aggregate principal amount of our 4.625% Senior Notes due August 1, 2010 outstanding; and

•· A portion of our 5.000% Senior Notes due May 3, 2010; as of June 30, 2009, there was approximately $193.6 million aggregate principal amount of our 5.000% Senior Notes due May 3, 2010 outstanding

... The final deal terms were $300 million of 9.625% notes due March 2016, priced at 99.42% to yield 9.75%. The syndicate, primarily BofA ML will pocket $5 million in underwriting fees (oddly, less than the customary 3% for a HY offering - are companies starting to demand more bang for their buck?).

And the ever crucial Use of Proceeds? Why paying back Bank of America's 2010 maturing credit facility, as if there was ever any surprise. More specifically:

Not a bad deal: the company refinances BofA's 2010 bank facility, which has a 1.5% interest rate with a 2016 term piece of paper, paying 9.625%. Any way you look at it, it goes to show the "solid fundamentals" behind the sector, where the cost of extending a maturity is 6 times the current interest rate!


This excerpt was taken from the ZeroHedge posted linked above. What I think they missed was that the yield on the secondary was much less relevant than it appeared, since DDR was probably going to pay it in stock (that's right, that funny stock split cum dividend thing).

Step #3: Shift the tax liabilities upon those who you dumped the stock on... The last step in this new REIT game, after dumping the unpayable debt converted into follow-on offering stock is to push the fake dividends and shift the tax liabilities of said fake dividends from the entity that generated the liability on to the investor. Normally, if the cash is not paid out, the REIT would have to pay the taxes on it. Now the REIT can keep the cash, dilute the stock by offering the pump and dump secondary,  then pass the tax liability off to the guys that were suckered into buying the stuff, most likely by sell side brokers and analysts - as was exemplified by the BofA Merrill Lynch excerpts above. If you feel as if I (actually, Zerohedge since they broke the story) am being a little hard on the Merrill guys, check out what their ex-REIT analyst head had to say as soon as he left the company - More from Zerohedge: Some Totally Unexpected REIT Lack Of Love From Merrill Lynch -

"From a financing standpoint things are far worse; from a fundamental standpoint things are certainly getting worse.".

As a matter of fact, this alleged "bait and switch" behavior was called out by ZeroHedge in an open letter to the SEC: Open Letter To The SEC Regarding Wall Street's REIT Bait-And-Switch:

Zero Hedge is well aware that our regulatory friends at the SEC and FINRA enjoy going through our articles in search of the "next big scam." We are always happy to make their lives a little easier and not only connect the dots but give them everything they need on a silver platter so that even a green securities lawyer, 4 hours fresh out of law school, would be able to comprehend and litigate.

A few weeks ago I caught on a troubling trend whereby Merrill Lynch/Bank of America embarked on an epic quest to underwrite equity follow on offerings for a vast majority of the lowest quality REITs including Kimco, ProLogis, Duke Realty and others. I say lowest quality, because Merrill's own analysts had a Sell rating on these names as recently as March 31 (for Kimco) and January 6 (for ProLogis). How the global economy has really changed for the better of REITs since then is still a mystery to me. But I digress. 

The following is the dividend payment history as gaken from DDR's website, to help drive the point home on the dividend thing:

Historical Dividends Issued

Yearly summary of dividends 

Declared Ex-Date Record Payable Amount Type
Sep 10, 2009 Sep 21, 2009 Sep 23, 2009 Oct 15, 2009 0.02 U.S. Currency
May 28, 2009 Jun 9, 2009 Jun 11, 2009 Jul 21, 2009 0.2 Optional dividend (cash or stock)
Mar 2, 2009 Mar 10, 2009 Mar 12, 2009 Apr 21, 2009 0.2 Optional dividend (cash or stock)
Oct 24, 2008     Jan 7, 2009   Dividend omitted
Total dividends paid in 2009: 0.4200
Aug 19, 2008 Sep 24, 2008 Sep 26, 2008 Oct 7, 2008 0.69 U.S. Currency
May 15, 2008 Jun 18, 2008 Jun 20, 2008 Jul 8, 2008 0.69 U.S. Currency
Jan 9, 2008 Mar 18, 2008 Mar 21, 2008 Apr 8, 2008 0.69 U.S. Currency
Nov 19, 2007 Dec 19, 2007 Dec 21, 2007 Jan 8, 2008 0.66 U.S. Currency
Total dividends paid in 2008: 2.7300
Aug 15, 2007 Sep 20, 2007 Sep 24, 2007 Oct 2, 2007 0.66 U.S. Currency
May 17, 2007 Jun 18, 2007 Jun 20, 2007 Jul 3, 2007 0.66 U.S. Currency
Feb 16, 2007 Mar 21, 2007 Mar 23, 2007 Apr 9, 2007 0.66 U.S. Currency
Nov 20, 2006 Dec 20, 2006 Dec 22, 2006 Jan 8, 2007 0.59 U.S. Currency
Total dividends paid in 2007: 2.5700
Aug 15, 2006 Sep 14, 2006 Sep 18, 2006 Oct 2, 2006 0.59 U.S. Currency
May 17, 2006 Jun 15, 2006 Jun 19, 2006 Jul 5, 2006 0.59 U.S. Currency
Feb 15, 2006 Mar 20, 2006 Mar 22, 2006 Apr 3, 2006 0.59 U.S. Currency
Nov 15, 2005 Dec 21, 2005 Dec 23, 2005 Jan 6, 2006 0.54 U.S. Currency
Total dividends paid in 2006: 2.3100

I guess they consulted some of their financial engineers, and decided a couple of pennies (literally) would do for now, though:


Developers Diversified Realty (NYSE: DDR) today declared its third

quarter 2009 common stock dividend of $0.02 per share. The common

dividend is payable October 15, 2009 to shareholders of record at the

close of business on September 23, 2009.


    The Company has elected to maintain a cash dividend comparable to prior quarters but has elected to not pay the stock portion as the Company's most recent estimates indicate that the payment of the stock portion is not required to maintain REIT status. The Company will continue to review its dividend policy on a quarterly basis and make payments sufficient to maintain REIT status, receive favorable tax treatment and provide yield to shareholders while prudently assessing its current liquidity and the state of the capital markets.

This does tend to make one wonder what the hell income investors are thinking in buying a virtually income-less investment that has such potential for capital loss! What the IRS should have done was allowed the REITs to simply pay corporate taxes for the years that they did not want to issue cash dividends. Of course that defeats the purpose of trying to save cash. It is also this concept called capitalism and a dearth of a competitive advantage. Forget that rant, let's attempt to drive this dividend point home by taking an individual investor in the 34% tax bracket that has 10k shaes of Brand X REIT at $20 per share, and receives $1 dividend, 90% of which was paid in stock. This equates to $9,000 stock (re)distribution and $1,000 in cash. He will end up paying (.34 * $9,000) $3,332 in taxes on what amounts to a stock split, and will only have (.34 * $1,000) $660 in cash to cover it from the balance of the dividend distribution. In this scenario, the retail investor will be out of $2,672 in after tax cash for every $10000 of 90% stock dividend distribution. Will he ever see that income again? Doubtful! Hey, what if Reggie Middleton is right (see "Boo!!! Will Halloween Scare the Market into Respecting the Fundamentals?" and "Re: Commerical Real Estate and REITs - It's About That Time, again...") and the CRE market tanks even more in the future? Well, Mr. Investor will have some capital losses with which he can try to convince his accountant to try to use in some creative and imaginative fashion to offset that phantom income (albeit attached to some quite corporeal taxes) that he never saw, touched, nor even had a chance to spend!

It appears as if we have been catching REITs in all types of mischevious things as of late. Remember GGP? In "If only more rich heiresses read my blog"
I made note of the big lawsuit filed by the heiress to the ex-GGP's
ex-fortune suing her law firm for misconduct. If she read BoomBustBlog
she, her lawyers and the SEC would have seen that we practically laid
out a roadmap of misconduct for all interested parties, complete with
pretty charts and everything (excerpted from "blog readers chimed in with their expertise and opinions"): ggp_ownership_structure.gif


I read your post on the redemption and share purchase with great
interest. I reviewed the 13D filing and there seems to be an exhibit
missing. The section summarizing the 500M loan facility, references the
complete loan agreement as an exhibit.  It is no where to be found.
Where is it?

 The prohibition of personal
loans under section 402 of Sarbanes-Oxley amended section 13 of the
1934 SEC act, broadly prohibits public companies from making or
arranging many types of personal loans, directly or indirectly, to
their directors and executive officers.

 As you aptly note,
there are a boatload of questions. Not the least of which is the
question concerning the terms of the Citi loan. I think what you're
alluding to as the real purpose of these transactions follows: GGP
issues shares 22.8 m shares at $36 dollars a share (821M).  MBCP III
takes 10% of the issue for $88M. MBCP III purchases division "B"
interest from the Matthew Bucksbaum Trust and General Growth
Corporation, paying for the "interest with GGP LP units the to
Bucksbaum Trust.  

Next up will be a list of REITs that didn't make my final shortlist, then next week I will debut the first of my 4th quarter 2009 REIT short candidates for subscibers.

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Anonymous's picture

When did this become the kkk blog

Anonymous's picture

ya, what's with the racist elders comments?

I think the guys who scheme on Wall St comes in all shapes, sizes, religions, and political beliefs. They are just humans.

Herd Redirection Committee's picture

I always thought it was funny when people said the Protocols are fake.

Well, whoever faked it, sure did their research!

Of course it has been used to misdirect our anger, but that alone does not make it 'fake', just altered to deceive even further.

Prophet of Wise's picture

Protocols of the Learned Elders of Zion: Our present state in the March to Progress!


Reservoirs of riches – Destruction of goy aristocracy – Vicious circle of rising prices

1. We shall soon begin to establish huge monopolies, reservoirs of colossal riches, upon which, even large fortunes of the goyim will depend to such an extent that they will go to the bottom, together with the credit of the States, on the day after the political smash....

2. You gentlemen here present who are economists, just strike an estimate of the significance of this combination!...

3. In every possible way we must develop the significance of our Super-Government by representing it as the Protector and Benefactor of all those who voluntarily submit to us.

4. The aristocracy of the goyim as a political force, is dead – We need not take it into account; but as landed proprietors they can still be harmful to us from the fact that they are self-sufficing in the resources upon which they live. It is essential therefore for us, at whatever cost, to deprive them of their land. This object will be best attained by increasing the burdens upon landed property – in loading lands with debts. These measures will check land-holding and keep it in a state of humble and unconditional submission.

5. The aristocrats of the goyim, being hereditarily incapable of contenting themselves with little, will rapidly burn up and fizzle out.

6. At the same time we must intensively patronise trade and industry, but, first and foremost, speculation, the part played by which is to provide a counterpoise to industry: the absence of speculative industry will multiply capital in private hands and will serve to restore agriculture by freeing the land from indebtedness to the land banks. What we want is that industry should drain off from the land both labour and capital and, by means of speculation, transfer into our hands all the money of the world, and thereby throw all the goyim into the ranks of the proletariat. Then the goyim will bow down before us, if for no other reason but to get the right to exist.

7. To complete the ruin of the industry of the goyim, we shall bring; to the assistance of speculation, the luxury which we have developed among the goyim; that greedy demand for luxury which is swallowing up everything. We shall raise the rate of wages which, however, will not bring any advantage to the workers, for, at the same time, we shall produce a rise in prices of the first necessaries of life, alleging that it arises from the decline of agriculture and cattle-breeding: we shall further undermine; artfully and deeply; sources of production, by accustoming the workers to anarchy and to drunkenness, and, side by side therewith, taking all measures to extirpate from the face of the earth all the educated forces of the goyim.

8. In order that the true meaning of things may not strike the goyim; before the proper time; we shall mask it under an alleged ardent desire to serve the working classes and the great principles of political economy, about which, our economic theories are carrying on an energetic propaganda. 


SV's picture

Great post - I expect that even the uneducated eye can look at the Historical Dividends issued chart to understand the magnitude of the problem.  The tax implication is something most investors won't understand until the IRS cometh.

Anonymous's picture

Did you know that cows eat grass, throw it up into their own mouth and eat it again?

Of course you did...

Regurgitation, it's not just for breakfast.

Steak's picture

Reggie, what steps do you think would facilitate this information being used by any enterprising prosecutor?  Is it simply a qusetion of exposure, would it help if legal minded readers dug up the relevant legal codes that apply in this case?

You note that you (intentionally or not) laid out practically the entire case for the heiress.  And I've seen several blog posts from budding Markopoloses (Markopoli?) where it seems the only additional step would be submitting the post to a court.  Surely there is something more than can be done with this information.

Reggie Middleton's picture

Now that I think of it, I am pretty sure securities regulators combed through my site and decided to do something about PPD. See

Steak's picture

Well thank you for the analysis you do and sharing it with the public...its very meaty and filling, so to speak.

Reggie Middleton's picture

I think it is just a matter of exposure. I out this stuff pretty often, but my blog is rather specialized and probably doesn't have the volume of traffic needed to kick things off in a big way. I'm sure if this stuff hit the mainstream media, the political pressure to take a stronger look would be significant. The legal code citations from the readers would probably make it difficult ot pass up for the right people.

I am not a lawyer nor one to play "Mr. Snitch", but if I were an enterprising young ADA, I would be all over this stuff. The content on Zerohedge or can easily make a young prosecutor's career. I guess its a good thing I am a macro investor instead of an ADA, eh?

Cognitive Dissonance's picture

It seems it's all about who you know and who you blow. If the masters of the universe, for whatever reason, don't want you to fail until you can off load your liabilities onto the public, that's the way it's going to be.

The new normal in black and white.

Anonymous's picture

As the saying goes, "When will this come to an end?" Will it be a market event or regulatory minutiae or something else that finally open the eyes of these idiots accepting REIT paper which is doomed to fail?

Anonymous's picture

Excellent work, as always.

DaddyWarbucks's picture

"In this scenario, the retail investor will be out of $2,672 in after tax cash for every $1 of 90% stock dividend distribution."


Reggie Middleton's picture

Well, it sounds that bad because I had a typo in there. It actually should read "In this scenario, the retail investor will be out of $2,672 in after tax cash for every $10000 of 90% stock dividend distribution."

It's still pretty bad, though.