No. of Recommendations: 2
Would you really want to own a REIT that has failed to take advantage of the interest rate environment of the past few years?

Nope but would you really want to own a highly leveraged company with a high payout ratio in a rising rate environment?

WRE may do fine but the dividend is far riskier in a rising rate environment. As an income oriented investor, I focus on risk, ie, is the dividend sustainable & can it be increased?

In 2003, WRE's interest expense was $30 mil on $460 in LT debt (no short term debt). Impute an interest rate. Then increase the rate by .5%. Calculate the new interest expense. Divide it by the shares outstanding. A very rough and dirty estimate (I haven't looked at the detail of their debt) says that for every .5% increase in rates earnings may decrease by around $0.045/share. Does that mean a dividend cut? Probably not immediately. But eventually it must unless they can make up the difference by cutting operating costs which they will obviously try to do. Salaries and benefits are always the single biggest item so that is what they will target. Can they find enough savings in the operating expenses on a sustained basis? Who knows but that's one of the places you look to see if increased debt servicing can be offset. The other place you look is on the revenue side. Are price increases sticky? Do they have diversified sources of income?

The other problem with rising rates is that the cost of new borrowing will increase meaning that asset purchases will have a higher return threshhold meaning that there will be fewer viable opportunities. The other new capital alternative - equity - will be problematic in a falling market.

I'm not picking on WRE; I'm just using it as an example. When rates are low or falling, the balance sheet is less of an issue but when rates are climbing or high, watch out.

Regards,
Mike
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