CDR announced it is selling its assets. Preferred CDR-B is down over 50% today to $10.
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And the Common is up over 13%!
Why the move in opposite directions?
Chuck
And the Common is up over 13%!
Why the move in opposite directions?
Because CDR isn’t just selling the assets, it’s selling the company to Wheeler (WHLR). https://finance.yahoo.com/news/cedar-realty-trust-announces-… which lost money and hasn’t been paying dividends.
The common shareholders will be paid cash for their shares, while the preferreds will become an ‘obligation’ of WHLR I say ‘obligation’ because WHLR has suspended the payment of dividends on their preferreds, and then had common shareholders vote on whether the rights of preferred shareholders to cumulative dividends should be taken away. Of course, the common shareholders, who don’t get paid a dividend until after the preferred dividends are paid, voted to remove those rights. https://d1io3yog0oux5.cloudfront.net/_8a95105400a2f23af8ced7…
DIVIDENDS
• On November 3, 2021, common stockholders of the Company voted to amend the Company’s Charter to remove the cumulative dividend rights of the Series A Preferred and Series B Preferred.
I would expect that the dividends for the CDR preferreds will be suspended pretty quickly and if there are any rights to cumulative dividends, they will similarly be removed.
AJ
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WOW! !
I didn’t realize that cumulative dividends could be removed with a simple vote of the common shareholders.
This certainly puts the world of Preferreds under a new light for me. I have owned them many times in the past but currently hold none.
Chuck
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I didn’t realize that cumulative dividends could be removed with a simple vote of the common shareholders.
It’s not clear that legally, it can be. WHLR is being sued over that removal. From their Annual Report https://ir.whlr.us/sec-filings/annual-reports/content/000152…
Steamboat Capital Partners Master Fund, LP and Steamboat Capital Partners II, LP v. Wheeler Real Estate Investment Trust, Inc.,Steamboat Capital Partners Master Fund, LP and Steamboat Capital Partners II, LP v. Wheeler Real Estate Investment Trust, Inc., Circuit Court for Baltimore County, Maryland. On October 25, 2021, Steamboat Capital Partners Master Fund, LP, a Cayman Islands exempted limited partnership and stockholder of the Company, and Steamboat Capital Partners II, LP, a Delaware limited partnership and stockholder of the Company, filed suit against the Company in the Circuit Court for Baltimore County, Maryland. The complaint alleges that the Company’s rights offering of convertible debt to the Company’s common stockholders, and the notes issued pursuant to the rights offering, breached the provisions of the Company’s governing documents and violated the rights of the holders of the Series B Preferred and Series D Preferred. Plaintiffs seek relief as follows: require the Company to pay all dividends accrued, as of the date of the rights offering, on the Series B Preferred and Series D Preferred, and prohibit the Company from paying interest on the notes held by the Company’s common stockholders (upon exercise of the rights) until all accrued dividends on the Series B Preferred and Series D Preferred are paid. Plaintiffs also seek a declaration that the rights offering by the Company to its common stockholders, which resulted in the issuance of notes, when accrued Series B Preferred dividends and Series D Preferred dividends had not been fully paid, breached the provisions of the Company’s governing documents. In addition, the complaint contends that the Company’s amendment of its charter to remove the cumulative nature of dividends from the Series B Preferred cannot be applied retroactively. A trial date is set for May 2023. At this juncture, the outcome of the matter cannot be predicted.
But in the meantime, I don’t see what’s stopping WHLR from doing the same thing with the CDR preferreds.
AJ
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Have there been any prior cases in which a company has retroactively eliminated the cumulative dividends for preferred? Has that ever happened in the past?
JimA
Have there been any prior cases in which a company has retroactively eliminated the cumulative dividends for preferred? Has that ever happened in the past?
That’s a great question for someone to research. Until this attempt, I’ve not seen it happen except under a bankruptcy reorganization.
AJ
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waldonization
waldonization
Except waldenization is when a public company goes private, so trading stops on all of their issues, including preferreds, and the company refuses to redeem the preferreds. In this case, WHLR is still a public company.
AJ
The concept is same. Basically trap the preferred holders without dividend and buy it back for pennies on the dollar. All the profit out of that immoral actions goes to common holders.
The concept is same. Basically trap the preferred holders without dividend and buy it back for pennies on the dollar. All the profit out of that immoral actions goes to common holders.
Don’t disagree that it seems to mostly be a way to enrich common shareholders by damaging the preferred holders. That said - with Waldenization, the problem is that there is no open market that the shares can be sold on, since they’ve stopped trading. With CDR, the preferreds still trade and will continue to trade, so while the preferred holders may not get their full value back, they are still at least getting dimes or quarters on the dollar instead of pennies. For instance, CDR-B traded as high as $12.95 today, so some sellers got more than half of the par value on the sale.
AJ
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Remember, when you buy preferred your operating thesis is common equity is infront of you to take the hit. Now they just rewrote the rules. That’s immoral, illegal. Why we are not able to prosecute that I don’t know.
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Remember, when you buy preferred your operating thesis is common equity is infront of you to take the hit. Now they just rewrote the rules. That’s immoral, illegal. Why we are not able to prosecute that I don’t know.
I get it, and I agree that it’s wrong. As I said, Wheeler is being sued civilly, but I don’t think it’s a criminal offense, so there won’t be any ‘prosecution’.
AJ
What ever happened to the Walden preferreds in the end?
While I have owned a few REIT preferreds in the past, I have never been a big fan and have not owned any for over 10 years.
I have read a lot of conflicting accounts of what happened in the Waldenization.
The 3rd post in the link below stated that the Walden preferreds were actually increased a little bit and that the preferred shareholders had the right to put then back to the acquiror in 10 years. Other accounts claim that the treatment of the Walden preferred holders was less generous.
https://discussion.fool.com/quotwaldenizedquot-28160296.aspx?sor…
Not the above threat was a few years after the indicent.
So, in the end just what happened to the Walden preferred holders, anyone know?
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To me the answer doesn’t matter one bit.
I am retired and when I had Preferred Stocks in the past it was solely to generate the income.
Waiting for a period of time for the lawyers and courts to sort it out would not help at all. Even if I came up on the winning side.
Like I stated in the earlier post, this puts preferreds in a whole new light for me.
Chuck
To me the answer doesn’t matter one bit.
I am retired and when I had Preferred Stocks in the past it was solely to generate the income.
Waiting for a period of time for the lawyers and courts to sort it out would not help at all. Even if I came up on the winning side.
On the other hand, if you are generating income from common dividends, bonds or notes, or by selling to realize capital gains - those all have risks associated with them, too.
Like I stated in the earlier post, this puts preferreds in a whole new light for me.
WHLR is one company out of how many companies that issue preferreds that have done this vs. the number of companies that issued preferreds and haven’t? And it’s still not clear that WHLR is going to get away with it. Yes, I get that it’s a risk. But it seems like it’s a pretty small risk in the grand scheme of things, and often can be mitigated by just paying attention to what’s going on with the issuing company.
For instance - anyone who was still holding CDR preferreds after CDR announced that they were looking for a merger or sale of the company, and/or selling CDR’s assets 6 months ago http://ir.cedarrealtytrust.com/News/news-details/2021/Cedar-… was taking on a greater risk of a poor outcome than a typical preferred holder. That risk could have been mitigated by selling the preferreds at or above par as recently as just before the sale was announced. So while I have empathy for CDR preferred holders, IMO they do bear some responsibility for not understanding that bad things can happen to preferred holders when the issuer is looking to change their strategic direction. And as far as WHLR preferred holders, while in theory, they had cumulative dividends that were supposed to protect them, anyone holding preferreds that have suspended their dividends (cumulative or not) is taking a speculative position, that more often than not, will probably not end well. I agree that WHLR is playing dirty trying to eliminate the cumulative aspect of the preferred dividends, and I hope that the preferred holders win their lawsuit. But even if they do, given the financials of WHLR, I suspect that WHLR will end up in BK before any judgments are paid to the preferred holders.
AJ
AJ,
It is not just WHLR, if you own preferred in any company that is in trouble you are at risk. The real concern is, preferred holder risks should kick in after the equity gets wiped out, but equity survives and preferred is taking hit is changing the order of credit/ risk structure. It doesn’t matter for companies that are not in risk is not the right argument.
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Could this become a tactic used by Hedge Funds and/or Corporate Raiders?
I see the potential for a lot of abuse here on what may be otherwise good investments.
Chuck
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Normally in a successful companies, it is difficult to do and no reason to do. When you have a broken REIT, one of the ways seems to be divest the assets or sell it to another entity (private or public), where that entity, divests assets pays the debt incurred to acquire, and recover their equity and profits and leave the preferred hanging.
Some of the risks, I look at is, preferred to common equity, etc.
Here is one thing I am watching is PEI, this is a broken mall REIT, they have some decent properties. They have 3 series B,C,D outstanding and each has about 80 M shares and in total face value of $6 B. In most scenarios of recovery, the equity holders will be left with very little to nothing after servicing/ paying the debt and preferred holders.
So, if you are someone enterprising, take the company private, strip the assets and leave the preferred hanging. The right thing to do in these situations are, the management will not do it, but still the right thing to do is, wipe the equity, then convert the preferred to equity and in that process wipe the equity, this will re-capitalize the new company and the preferred holders become the new holders of the company. In time they can recover their capital. This was done in the past.
Now, the capital markets turned immoral, and sick.
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It is not just WHLR, if you own preferred in any company that is in trouble you are at risk.
My point is that it’s a small risk - how many companies have actually used tactics like this out of the universe of companies that have issued preferreds? WHLR, Walden and who else? And since the lawsuit against WHLR isn’t even going to trial until 2023, it’s not clear that they are going to get away with it.
It doesn’t matter for companies that are not in risk is not the right argument.
My argument wasn’t that it doesn’t matter for companies that are not in risk. My argument was it’s a small risk, and preferred owners are likely able to mitigate against that risk by paying attention to what’s happening at the company that issued the preferreds. I would find it very unlikely that an issuer that hasn’t been in financial difficulty would try to pull these tactics, which seems to be in line with your statement above of if you own preferred in any company that is in trouble you are at risk
That said, truly, I don’t mind if people are scared away from preferreds by this small, mostly mitigable risk. It just means that there are few potential buyers and more potential sellers of preferreds, which, with thinly-traded issues (as many preferreds are) means it’s more likely that I will be able to pick up a bargagin.
Yes, preferreds have risks, and this is one of them. But so does every other investment. Even just stuffing money in your mattress has inflation risk.
AJ