dar provided this excellent answer to the same question posted on another thread...
"The fair market value of the NRE stock will be the dollar amount distributed in the spin. This amount will be added to cash distributions to arrive at total distributions. Next is to determine whether all distributions are taxable. NRF has no accumulated earnings & profits (E&P) going into 2015. I know this because some of the 2014 distributions was return of capital. Thus, 2015 distributions will be taxable to the extent of 2015 E&P, which is a modified form of taxable income.
For purposes of illustration, let's assume cash distributions total 685 million comprised of 600 million to common and 85 million to preferred. Let's also assume the fair market value of all NRE stock is 1.8 billion at the date of distribution and the basis of the stock in NRF's hands is 1.3 billion. NRF will recognize a 500 million gain on the distribution. If NRF has held NRE stock for more than one year as of the date distributed, NRF's gain will be long term capital gain. If not held more than one year, it is a short term capital gain which, for reit dividend taxability to shareholders, is ordinary.
So total distributions will total 2.485 billion (685 million cash plus 1.8 B FMV of nre stock). Let us now suppose that NRF's taxable income excluding the gain on NRE is 300 million (because of depreciation and robber shares). Total taxable income is 800 million (300 regular plus 500 gain on distributing nre stock). Assume adjustments to get to E&P are 40 million positive. Thus, current E&P is 840 million.
The first 85 million gets allocated to preferred which is 100% taxable and 755 million is left for common. Common got 2.4 billion and 755 million is taxable (probably ordinary). Thus 31.46% of the common distribution is taxable (755 / 2.400), probably ordinary, and 68.54% is return of capital."
Thank you dar for taking the time to answer the question and doing so in such a clear and understandable manner
Thank you dar for taking the time to answer the question and doing so in such a clear and understandable manner.
You and your constant efforts are very much appreciated.
I have been concerned about the tax implications of the "spin-off" of NRE from NRF that is to take place later this year. We have been told:
"The Company expects that the proposed spin-off will be treated for tax purposes as a distribution to NorthStar Realty common stockholders equal to the fair market value of the distributed NorthStar Realty Europe shares."
As I understand it, this is because NRF acquired the assets that would comprise NRE in the last couple of years and therefore NRE would not meet the 5 year rule:
"The parent and subsidiary must both have been engaged in an "active trade or business" the entire 5 years preceding the spin-off, and neither entity may have been acquired during that period in a taxable transaction."
Therefore the question becomes how will the distribution be treated for tax purposes? Concerning this question I read the following:
"In the unusual event that a spin-off does not qualify for tax-free treatment, there are two levels of tax:
1. Ordinary income at the shareholder level equal to the FMV of subsidiary stock received (similar to a dividend) and,
2. Capital gain on the sale of stock at the parent entity level equal to the FMV of subsidiary stock distributed less the parent's inside basis in that stock.Apparently the transaction would be considered ordinary income to the NRF stockholder."
If NRF was a c Corp, the tax treatment to the individual share holder would appear to be ordinary income but NRF is a REIT and therefore the question becomes if the individual share holders would pay the capital gains on the distribution that would usually be paid by the parent company or if, being a REIT, the share holders of NRF would pay the capital gain on the transaction or if their distribution is still considered to be ordinary income, taxed at the ordinary income tax rate.
I am no tax expert and so I would appreciate comments from those who could help answer the question as to how the distribution to the share holder will be taxed.
My question is will the distribution be considered as an ordinary dividend, capital gains, or something else for tax purposes.
Assuming the spin shares are distributed this year, will they be treated as ordinary dividend distributions or capital gains, or some other tax designation?
I would suggest reading/listening to the latest CC and you will find the answer as to why the dividend will not be cut in 2015 or 2016.
"Current or accumulated earnings" which also means accumulated losses. For 10 years I paid no taxes because of a business loss, but it did not mean that I was broke, far from it. What matters is the underlying cause of why distributions were in excess of current of accumulated earnings and profits. Notice, and this is important, that the "core operating income" has NOT been restated. Not making a taxable profit is not the same thing as losing money, just ask anyone who own investment real estate or oil and gas wells.
Thoughts on AI:
1. Core income of $1.50 strongly indicates that the $.875 dividend will be maintained. (The reason AI calculates their "Core Income"/CAD is to give investors an idea of how safe the dividend is).
2. The decline in BV last quarter was largely due to Marking-to-market of their interest rate hedges which lost value as interest rates approached a historic low in the 1st quarter. This will reverse as interest rates have risen substantially since then.
3. Listening to the quarterly CCs and reading AI's SEC filings (10Ks) is where investors should look for information upon which to base their investment decisions.
4. I am a long term income "investor" and not a "trader". As such, I continue to see substantial value in owning AI and as long as they continue to have "Core Income" sufficient to allow them to continue paying the current dividend I will remain an investor
5. Different people have different investment objectives. Figure out what your objectives are and then act in accordance with those objectives. I am a long-term income investor and as such I don't worry as much about the daily/weekly/monthly price movements as much as I concern myself with the quarterly earnings.
I personally put more trust in AI's financials/SEC filings than I do in either historical president or price action of a stock. The current dividend of $.875 is more than covered by last quarters core income of $1.50.
Look at AI's SEC filings. The dividend is more than covered by their "core operating income" of $1.50.
There is a reconciliation of "core operating income" to GAAP included in the 10K and the 10Q for each quarter that I believe will explain your questions. As for when the NOLs run out, part of them expired in 1014 and 2015 and the remaining expire in 2027-2028 if I remember correctly. (I may be off a year). The NOLs are the reason that AI has elected to pay corporate taxes and have the dividends qualified, otherwise it would elect to be a REIT with non-qualified dividends.
AI reported a GAAP loss for the first Quarter but a "core operating income" of $1.50 per share.
ARLINGTON, Va., April 27, 2015 /PRNewswire/ -- Arlington Asset Investment Corp. (NYSE: AI) (the "Company" or "Arlington") today reported non-GAAP core operating income of $34.5 million for the quarter ended March 31, 2015, or $1.50 per diluted share. A reconciliation of non-GAAP core operating income to GAAP net income (loss) appears at the end of this press release. On a GAAP basis, the Company reported a net loss of $(42.2) million for the quarter ended March 31, 2015, or $(1.84) per diluted share, compared to net loss of $(32.8) million for the quarter ended December 31, 2014, or $(1.43) per diluted share, and net income of $7.0 million, or $0.41 per diluted share, for the quarter ended March 31, 2014.
For 2014 they reported:
Arlington Asset Investment Corp. Reports Fourth Quarter and Full Year 2014 Financial Results
Non-GAAP core operating income of $1.40 per share (diluted) for the fourth quarter 2014(1) or $5.19 per share (diluted) for the year ended December 31, 2014
GAAP net loss of $32.8 million (includes $27.5 million of tax provision) for the fourth quarter 2014, or GAAP net income of $6.0 million (includes $49.4 million of tax provision) for the year ended December 31, 2014
So, they show a GAAP loss for 2014 and for Q1 of 2015 and yet a core operating income that easily covers the dividend. How is this possible? Non-cash expenses/write-downs/off-sets.
Oh yes, I do prefer tax deferred dividends provided the company's earnings are adequate to cover them which I believe is the case with AI
I do not know why the switch was made but I can think of some possible reasons, most of them doing with the portion of the NOL that was expiring last year and this year. But regardless of what my guesses might be, they would only be guesses. Their CAD however is not a guess and it has not only been more than sufficient to cover the dividend but has been growing. It is hard for a company to get into too much trouble, especially in the short term, if their CAD is more than sufficient to cover their dividends and it is for the dividends that I have invested in AI
What are the reasons you feel a dividend cut might be coming, especially when CAD very adequately covers the dividend and had done so for several quarters?
The question should be, why are the dividends being treated as ROC rather than qualified dividends? AI CAD (cash available for distribution) has more than covered their dividends for years now and it is CAD that will drive dividend policies. AI has had a large tax loss carry-forward against which they can offset what would otherwise be taxable income. Last quarter they had a large write-down in BV caused by the loss of value of some of their interest rate hedges. These are book loses only. My advice is to watch CAD and should it fall below the amount being paid out as dividends, there there might well be an issue with maintaining the dividend. Again, the why is much more important in this case than the what.
"I Told you so, I told you so", how childish can a supposed adult get?
To base any decision on what someone says without supporting facts, logic, or basic thought is certainly not the approach of a mature investor and therefore to think that just because you make a statement on this board based upon what "your broker said" without anything to support either his/her statement or your own and then to expect to receive anything but thumbs down is also a bit childish.
I have no time for such childishness and that is what the Ignore button is for.
I would suggest listening to the most recent CC. All of your concerns were discussed including the dividend being maintained through 2016 and the shrinkage of the bulk shipping fleet.