The Mortgage Lender Implode-O-Meter
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Yikes, is right!
NovaStar has/had(?) REIT status, and paid out a whopping 30% dividend. With their anouncement last night, they stated that they would have virtually no "taxable income" through 2011 ... NO taxable income equals NO dividend.
I'm surpized that the stock price is only down 30%ish this morning. People own this stock for the dividend, and that just went to zero ... for the next five years!
I wonder what kind of trickle down affect this will have on the overall REIT market ....
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Just FYI--Taxable income does not equate to cash flows. So, no taxable income does not necessarily equate to no dividend. You can have no taxable income due to high deductible expenses such as depreciation that still leaves you with plenty of cash flow available to pay a dividend. On the other hand, you can have plenty of taxable income but no cash available to pay a dividend (if you had significant capital expenditures, for instance).
From theStreet.com:
"NovaStar is also considering whether it should retain the company's real estate investment trust status, it says. As a REIT, NovaStar is required to pay 90% of its taxable income as dividends to shareholders. NovaStar says it expects to "recognize little if any taxable income" through 2011. "
So....90% of 0 = 0.
Stock down from $18 - $10 in 2 days....It's a buyer's market!
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"NovaStar is also considering whether it should retain the company's real estate investment trust status, it says. As a REIT, NovaStar is required to pay 90% of its taxable income as dividends to shareholders. NovaStar says it expects to "recognize little if any taxable income" through 2011. "
So....90% of 0 = 0.
Stock down from $18 - $10 in 2 days....It's a buyer's market!
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It says they are REQUIRED to pay 90% of taxable income as a dividend. It does not say that they cannot pay a dividend if they have no taxable income, but they do have positive cash flows.
I'm not saying they will pay a dividend, just that $0 taxable income does not mean that there is no cash flow available to pay a dividend.
In fact, in looking at Novastars financial statements from 2005, they paid $202 million in dividends even though it appears that they had a taxable loss (as indicated by the $10 million tax refund they received). I am not saying Nova is healthy or a good stock buy. Simply stating that taxable income and ability to pay dividends do not necessarily equate.
In order to qualify as a Real Estate Investment Trust, the entity is required to distribute at least 90% of its taxable income to shareholders--by passing the money along, the REIT does not have to pay corporate federal or state income tax...the lucky recipients of the dividend do that heavy lifting (unless the shareholders hold them in tax-deferred retirement accounts).
If the REIT receives no taxable income, they can always borrow money or sell stock to get cash to make dividend payments, but the total dividend payout cannot exceed retained earnings....additionally, dividend payouts can also be influenced by debt contract restrictions (i.e., lenders will say, Lookie here, we'll lend you $50m to buy that Tattoo Parlor in SoWal, but we don't want you to fork over any of this money to pay dividends to your shareholders....Capisce??)
From what I've read, NovaStar has a pretty decent pile of cash, but how much of this money will be needed to buy back bad loans still remains to be seen. Since the stock price and the yield are inversely related, as the stock price continues to fall, the yield of course will rise--and the high yield will surely attract the devil-may-care speculators like moths to the flame. Another interesting story to watch and learn.
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CNBC Faber Report video:
http://www.cnbc.com/id/15840232?video=186844242
"The market in which subprime mortgages are bought and sold is in collapse with spreads having exploded by 300 basis points over the last few days."
http://www.cnbc.com/id/15840232?video=186844242
"The market in which subprime mortgages are bought and sold is in collapse with spreads having exploded by 300 basis points over the last few days."
CNBC is becoming the "all-'subprime disaster' all-the-time" network.
The Faber report again today was on the subprime meltdown impact.
"This is a market in true meltdown."
"The increase in spreads for BBB- has blown out this week. Another 94 basis pts. has been added to that spread this morning alone."
See the video here:
http://www.cnbc.com/id/15840232?video=187495599
The Faber report again today was on the subprime meltdown impact.
"This is a market in true meltdown."
"The increase in spreads for BBB- has blown out this week. Another 94 basis pts. has been added to that spread this morning alone."
See the video here:
http://www.cnbc.com/id/15840232?video=187495599
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