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Plum Creek Timber Co. Inc. Message Board

  • clintejr clintejr Jan 29, 2003 8:54 AM Flag

    If Bush provision makes it, will REIT's

    lose their appeal?

    The idea of a "forced" "dividend" is still appealing, but why not just by consitant dividend paying stocks for the tax free money?

    This could create a real negative flow of cash out of REITs unless I'm missing something.

    Any ideas out there?

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    • H&R Block does my taxes, and I don't worry about the tax consequences of oil & gas royalty trusts. I bought SJT at $11+. It is now a double. Considering the dividends and the growth in stock price, who cares about taxes.

    • If oil goes down to $25 the trust's income goes down as well. Distributions would drop as follows. If oil costs a trust $20 to produce, a reduction from $35 to $25 would reduce the distribution by 67%.

      Taxes are a bit complicated but not terrible. you get a statement from the company telling you what to do. Much to most of the distributions are tax deferred by oil depletion and depreciation. The balance is regular income. State taxes are not an issue except in Ohio, PA, and one or two others unless you hold lots of a CanRoy. Most states have a filing minimum income requirement that is $10,000 or more. Also don't think PA would go after you with $1000 in income for taxes cause you would not owe anything anyway.

      Remember a trust is a depleting asset. Distributions vary greatly with commodity pricing. See above. They can also run out of oil or gas! Use DD

    • Trusts are pass thru operations:
      1) Not eligible for favorable dividends tax rate
      2) fed tax: income and dividend not same since depletion and depreciation deductions. Sponsor should give details.
      3) state tax: the nightmare. My understanding is you have to file personal state tax returns in each state the entity does business in. Its not the dollar amounts but the paperwork!
      4) governance: voting power given to entity whose interest not necesarily same as owners. I generally avoid even stocks with multiple voting classes. I have no objection to management having voting power thru ownership, but cant accept voting power separated from ownership interest. Too often shareholders interests are ignorred for personal interests of control holders.

    • These trusts have a great return.Can you tell me the difference in owning a trust and a stock? How difficult is it to figure the taxes on the distribution? I presume it is taxed as regular income?What do you think will happen to these trusts if oil goes to 25-30 range?

    • In general yields on O&G trusts with high percentages of NG have tended to fluctuate in a general range of 8-20+% over the full year.

      Natural gas as a commodity tends to become much more expensive as winter approaches and then declines as spring shows up. Summer of last year the price of NG was well under $3.00 per mm BTU and now it is around $5.50. It was really low -around $2.00 earlier in 2000. Distributions of income to trust holders comes every month (for most O&G trusts) but these amounts are based mainly on the commodity prices of NG two months earlier. So, frequently (like now) the market anticipates current high distributions of income (based on commodity prices two months ago)to be temporary and sees both oil and NG prices falling as (1) the Iraq problem is settled, (2) the Venezula problem clears up, and (3) warmer weather overtakes winter in a couple of months. Basically, the market is saying, "Yes, you have very high distributions (and yields) now, but just wait a month or two and commodity prices and distributions will fall significantly so these yields and stock prices can't last." Therefore, many people who follow this market, try to time their purchases to buy in at a low warm season price and sell out at just prior to the spring thaw. This is not a bad strategy and I have been successful at it myself. However, there is evidence that NG prices may not be dropping as much this spring/summer as has been the case in the past.

      A very interesting thing about NG is that the North American demand continues to increase about 2-3% per year while the supply has been falling about 1-2% per year for the last couple of years or so. The demand for NG is not going away due to the very large numbers of new NG supplied energy plants brought on line over the last several years and the fact that so many homeowners now heat (and cool) their homes via NG.

      More and more followers of this market expect the peaks and valleys in the commodity price of NG to continue on an annual basis but expect the valleys to be at lower lows and the highs to be at higher highs due to the demand overtaking the supply. Very cold or very warm winters can disrupt this trend but only for a season at a time.

      For a very good read on Natural Gas see the Feb 3, 2003 Barrons (Commodities Corner p.MW14). The article, entitled, Gas Balloon - end of cheap natural-gas prices is over - gives some good insight into this piece of the energy market.

      The above is just my birds-eye view of NG but hope this helps those who might be interested in taking a look at NG.

    • Why is the yield sooo high(22%) on PVX?


    • Rising oil prices may or may not be a short term bet. Rising NG prices over the intermediate and long haul is a different story. NG demand has continued and will continue to grow in the U.S. as supply continues to drop slightly since the easiest to find areas have already been exploited and it becomes increasingly more difficult to find. Oil and gas royalty trusts - especially Canadian O&G trusts - have a very profitable outlook for the future. For two examples, check out PVX and PWI. These currently have yields of around 18-20%. Also, ERF which is more oil than gas is worth a look. O&G trusts tend to fall back in price after March so I wouldn't necessarily be jumping in right now. Canadian O&G trusts are preferable to the U.S. ones since they can add to reserves while the U.S. ones can't.

    • Makes sense, in general. On the other hand, with interest rates so low, and likely to be for a long time, a fairly high-yielding REIT ought to be very attractive for parking money in an IRA account. I started doing that and as PCL share price falls, have put more in. Would otherwise sit in moneymarket getting almost nothing.


    • Regular corporations would be more like REITs and Reits would lose some of their tax advantage comparatively.

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