In an about-face, Equity Office Properties Trust on Wednesday announced a 34 percent cut to its proposed 2006 dividend, after stubbornly resisting such a move despite rising vacancy rates and falling rents in its huge portfolio.
After the Chicago real estate investment trust said it was chopping its quarterly dividend to 33 cents a share from 50 cents, the REIT’s stock price fell 5.4 percent, to $29.20 a share, on the New York Stock Exchange.
Despite steadily declining earnings, the REIT has steadfastly refused to cut its dividend, covering a portion of the payout with the proceeds from the sales of office buildings that were either located in non-core markets, or were older and of poorer quality.
Billionaire investor Sam Zell, the REIT’s chairman who has zealously defended the dividend in the past, acknowledged the shift in strategy and responded to critics who have said the cut should have been made earlier.
“I’ve spoken of the importance of maintaining the dividend in the past. Reducing the dividend is the right thing to do at this time, given the reshaping of Equity Office over the past two years and plans for the future,” he said during a conference call with analysts. “It was not prudent to make a change before this.”
Partly because of the REIT’s reluctance, the dividend reduction surprised some analysts.
“We thought there was a higher chance that [Equity Office] would not cut its dividend,” said analyst Louis Taylor of Deutsche Bank Securities Inc.
The share price might have fallen even further if Equity Office hadn’t announced a $500 million stock buyback on top of the $811 million in shares it already has purchased this year.
Despite what Chief Executive Richard Kincaid called a “dividend reset,” the REIT predicted a shortfall of $50 million to $100 million in covering the 2006 dividend from adjusted funds from operations, a measure of a REIT’s cash flow. The shortfall would be covered by a moderate increase in borrowing and better financial performance in 2007.
The expected shortfall prompted some analysts to question why Equity Office didn’t impose an even steeper cut, particularly because of the slow improvement in the national office market.
“You could be in a situation in ’07 when the dividend isn’t covered again,” said analyst Greg Whyte of Morgan Stanley during the conference call.
The REIT, with 112.4 million square feet of office space, said its occupancy rate would be at least 90 percent at year’s end, but would rise to between 91 percent and 92 percent in 2006, a less-than-stellar performance.
But Zell said a larger cut would be inappropriate because of “our level of confidence in the next couple of years.”
The dividend cut is also a recognition that the REIT is a much smaller company after selling off assets this year totaling $2.6 billion.
Zell said he expects high prices for commercial real estate to continue, but denied that the REIT should be more aggressive in taking advantage of the market, saying the company is keeping its premium properties.
“There are asset sales that fall under what I would call commodity sales, and then there are asset sales of unique assets,” he said. “Everything that we have sold over the last two years would fall into the former category.”
But the REIT should be more active in finding joint venture partners, he said.
Funds from operations, or FFO, is net income excluding gains or losses from property sales or debt restructuring, with added-back depreciation of real estate. Adjusted FFO factors in certain recurring capital expenditures, such as leasing expenses.
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tcorfman@tribune.com
