I think we all know where the 2013 dividends are headed. But here's something interesting from the 2012 10-K that was just published (page 74), suggesting that NRF will need to potentially up its dividends even more in 2014.
"We believe that our Operating Partnership properly elected to defer, under Section 108(i) of the Internal Revenue Code, the recognition of cancellation of indebtedness, or COD, income generated from repurchasing its debt at a discount. If the IRS successfully challenges our Operating Partnership's ability to make that election, we may be treated as having failed to pay sufficient dividends to satisfy the 90% distribution requirement and/or avoid the corporate income tax and the 4% nondeductible excise tax. We may be required to correct any failure to meet the 90% distribution requirement by paying deficiency dividends to our stockholders and an interest charge to the IRS in a later year. Additionally, under Section 108(i) of the Internal Revenue Code, our Operating Partnership will be required to recognize the deferred COD income described in the previous paragraph ratably over a five-taxable year period beginning in 2014, which will increase the amount of our annual REIT distribution requirement in each of those years, without any corresponding increase in cash flow."
This sounds bullish for the dividend, but might place more pressure on NRF to start collapsing some of the securities CDO's to generate GAAP income and cash flow. Management seems to think that the loan CDO's have some equity recovery value, so these are going to be extended.
IMO, the likelihood of having the original deferral elections overturned by IRS is miniscule. The statute and subsequent IRS regulations are very taxpayer friendly and apply on a transaction by transaction basis. Thus, it's really hard to upset the whole applecart.
As to the 2012 discharge, that is included in 2012 taxable income because the election to defer only applied to COD income realized in 2009 and 2010.
Nevertheless, the prior deferrals are now being picked up as taxable over a 5 or 4 year deferral period.
I posted on this extensively when the issue was new.
Guys - here's another item in the 10K (page 112) that relates to the previous 2014 dividend post (above):
"Realized gains of $145.7 million for the year ended December 31, 2010 consisted primarily of net realized gains from the sale of CRE debt and security investments ($78.1 million), gain from the repayment and extinguishment of our secured term loan ($60.4 million)..."
The pertinent number here is the $60.4 million gain on repayment of the secured term loan. If you look at NRF's press release dated 7/1/10, you'll see that NRF was able to settle a $304 million credit facility with $208 million of cash, 2 million warrants, and a 40% interest in a mezzanine loan. It looks like when you boil it all down, NRF ended up with a $60 million cancellation of indebtedness (COD) gain.
So going back to my previous post on this subject, if NRF has to pay out an extra $60 million over five years, beginning in 2014, then that works out to $12 million per year divided by today's 200 million share count. Or $0.06/share. At the current pace, NRF would declare and pay $0.94 in 2014 anyway, so the extra COD income might result in a slight bump in the dividend rate, but nothing very material. Also, anyone want to guess how many shares will be out in 2014?
To sum up, extra COD income in 2014 should be helpful in keeping the dividend on an upward trajectory, but unlikely to cause a major change in total distributions, and any positive effect will continue to be diluted each year (2014-2018) as NRF raises additional equity.