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RAIT Financial Trust Message Board

  • wintertree660 wintertree660 Dec 28, 2008 2:09 PM Flag

    IRS Rule - REIT Stock Dividends

    Rev. Proc. 2008-68 provides, in pertinent part:

    "The Internal Revenue Service will treat a distribution of stock by a corporation that qualifies as a REIT . . . as a distribution of property . . . , and the amount of
    such distribution of stock will be considered to equal the amount of the money which could have been received instead, if ---

    (1) The distribution is made by the corporation to its shareholders with respect to its stock;

    (2) Stock of the corporation is publicly traded on an established securities market in the United States;

    (3) The distribution is declared with respect to a taxable year ending on or before December 31, 2009;

    (4) Pursuant to such declaration each shareholder may elect to receive its entire
    entitlement under the declaration in either money or stock of the distributing corporation
    of equivalent value SUBJECT TO A LIMITATION ON THE AMOUNT OF MONEY TO BE DISTRIBUTED IN THE AGGREGATE TO ALL SHAREHOLDERS (the “Cash Limitation”), provided that--

    (a) such Cash Limitation is not less than 10% of the aggregate declared distribution, and

    (b) if too many shareholders elect to receive money, each shareholder electing to receive money will receive a pro rata amount of money corresponding to their respective entitlement under the declaration, but in no event will any shareholder electing to receive money receive less than 10% of their entire entitlement under the declaration in money . . . ." (emphasis mine).

    This is a one-year ruling designed to help REITs conserve cash. I wouldn't call it HUGE, but it could be a useful tool if RAS needs to cut the cash portion of its dividend temporarily. In that event, I hope RAS make the Cash Limitation more than the minimum 10%.

    http://www.irs.gov/pub/irs-drop/rp-08-68.pdf

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    • No way with the price of ras stock so far underwater.
      On the other hand..do not find any provision preventing a REIT from issuing an 8% preferred in lieu of cash. Corporately, today, you cannot borrow $ at that rate. If ras opts to do that...the div money can be lent out at 12-13%...not a bad spread.
      I wonder if anyone at RAS reads this board.

    • No problem. Have a Happy New Year.
      GLTA. alf

    • You are absolutely right. I had a brain fart, I was thinking about something else. Happy holidays.

    • When divdends are reinvested each quarter, new shares are not being created. Shares are bought in the open market. This is not at all the same as a stock dividend where new shares are created.

    • "REIT'S ARE FAR LESS LIKELY TO LOWER THEIR DIVIDENDS WHEN PAYING IN SHARES."

      1) stop SHOUTING !

      2) You know _any_ REIT that is paying divs at a rate above the 90% mandated level?

      ( if below 90%...not a REIT much longer... )

      i.e.: no REITis likely to raise OR lower divs, regardless of what form the payment takes: only likely to pay out right at the 90% rate to preserve REIT status.

      • 1 Reply to phatcityskinny
      • 2) You know _any_ REIT that is paying divs at a rate above the 90% mandated level?

        YES, alot of them

        Trends and Statistics
        In recent practice, many REITs distribute all of or even more than their current earnings, often resulting in dividend yields comparable to bond yields. If an investment company such as a REIT distributes more than its taxable income, the excess distribution is considered "return of capital" for tax purposes (not taxed as ordinary income, but first reduces basis in REIT stock; if this brings the basis to zero, then remaining amount of the return on capital is taxed at capital gain rates). The distribution requirement may hamper a REIT's ability to retain earnings and generate growth from internal resources. This and other restrictions imposed by the Internal Revenue Code generally limit a REIT's suitability for growth-oriented investors. However, other considerations may result in potential for stock price appreciation, such as improvements in the REITs underlying leasing markets, changes in interest rates or increasing demand for REIT stocks.

        learn the difference between taxable income, FFO & CAD

    • Listen folks, this new ruling option is just plain bad news. Consider this; Ras announces they will pay 10% cash, the rest in stock. Sounds good, right? Upon closer scrutiny lets say that just after the declared ownership date (ex dividend date) 70% of stockholders decide to sell for the cash. It would be like a short blitzcrieg. The good news would be that the dividend is less likely to be reduced, or is it? Will RAS pay a 145% dividend if the stock price goes to $1.20? That could happen boys and girls.

    • Excellent post... Now all we have to do is watch all of the depressed REIT stocks, watch their xdate possibilities, guess at their chances for stock dividends, whether options are allowed, put all this together and then...gamble?

      Can you invent a computer program to do all of this?

      Let me know if you can, I'll subscribe..

    • Nah, I think he is talking about selling the jrt stock as a gain (he thinks the cost basis of the stock is 0, because they are issued as dividend) to offset capital loss in other stocks. I am not sure if he is correct tho, looks wrong to me.

    • Because of this new rule, do you think this could give RAS more incentive to issue more shares therefore diluting the current stock price? I realize they couldn't continue doing this more than maybe one time before share price is destroyed, but it could get them out of a bind for a quarter, by giving us a bunch of newly printed paper... Am I overlooking something? I hope...

      If this situation cannot happen, then I wouldn't mind getting my dividend in the form of stock or cash.

      Thanks

    • You say "The negative side is it's likely to put pressure on the PPS"

      I would agree with that, but often times when a stock dividend is cut, the stock actually rises because shareholders realize they have added liquidity.

      When a stock pays out a dividend it drops the NAV, but in this case it would be diluted on one end but balance out on the other, because the company retained the cash.

      Selling the stock to get your dividend in cash is a small price to pay for a more liquid company.

      Let's don't forget REIT's have always raised money by issuing stock and it's really not diluted if they use the cash appropriately.

      The tax consequences if anything would be a plus.

      REIT'S ARE FAR LESS LIKELY TO LOWER THEIR DIVIDENDS WHEN PAYING IN SHARES.

      In this liquidity crisis this could be precious liquidity.

      Steve

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