RioCan Real Estate Investment Trust has announced:
that it has successfully completed the issuance of 4 million Cumulative Rate Reset Preferred Trust Units, Series A (the “Series A Units”) at a price of $25 per unit for aggregate gross proceeds of $100 million. The underwriters have also been granted an over-allotment option, exercisable in whole or in part within 30 days following closing which, if fully exercised, would result in the issuance of an additional 1 million Series A Units issued at a price of $25 per unit for additional gross proceeds of $25 million. The underwriting syndicate for the offering was co-led by RBC Capital Markets, Macquarie Capital Markets Canada Ltd. and Scotia Capital.
The offering was made under RioCan’s amended and restated base shelf prospectus dated December 21, 2010. The terms of the offering are described in a prospectus supplement dated January 19, 2011, which was filed with Canadian securities regulators.
“The completion of this offering adds a new form of capital for RioCan that, used judiciously, enhances our ability to remain competitive in Canada and the United States for acquisitions,” said Edward Sonshine, Q.C. President and CEO of RioCan. “We view the use of Preferred Units as a complementary addition to RioCan’s capital structure. One that provides investors with a competitive yield and one that enhances RioCan’s financial flexibility and improves RioCan’s already strong balance sheet.”
This is a FixedReset, 5.25%+262 announced January 17 but the taxes are peculiar.
Taxation of Preferred Unitholders
A Preferred Unitholder is required to include in computing his or her income for tax purposes in each year the amount of income and net taxable capital gains, if any, paid or payable, or deemed to be paid or payable, to the Preferred Unitholder in the year by the Trust to the extent that the Trust deducts such amount in computing its income for tax purposes. The Trust’s income and net taxable gains for the purposes of the Tax Act will be allocated to the holders of Units and Preferred Units in the same proportion as the distributions received by such holders.
The amount of the non-taxable portion of any net realized capital gains of the Trust that is paid or payable to a Preferred Unitholder in a taxation year will not be included in computing the Preferred Unitholder’s income for the year. The Preferred Unitholder will not be required to reduce the adjusted cost base of the Preferred Unitholder’s Series A or Series B Units by such an amount.
Any other amount in excess of the income for tax purposes of the Trust that is paid or payable to a Preferred Unitholder in that year generally will not be included in the Preferred Unitholder’s income for the year. However, where such an amount is paid or payable to a Preferred Unitholder, the Preferred Unitholder will be required to reduce the adjusted cost base of the Preferred Unitholder’s Series A or Series B Units, as the case may be, by that amount. To the extent that the adjusted cost base of a Series A or Series B Unit would otherwise be a negative amount, the negative amount will be deemed to be a capital gain and the adjusted cost base of the Series A or Series B Unit to the Preferred Unitholder will then be nil. The taxation of capital gains is described below (see ‘‘Capital Gains and Capital Losses’’).
The company cannot be bothered to give a breakdown of their prior distributions by taxation status on their “Distribution Info” page, or in their 2009 Annual Report but, as previously reported there is a credible estimate:
BMO analyst Karine MacIndoe ran the numbers and found that RioCan has a historical five-year tax-deferral average of about 50 per cent. Applying that figure over a five-year horizon in the future, the pref units’ 5.25 per cent yield equates to a 4.82 per cent dividend yield on an after-tax return basis.
If we assume marginal rates for an Ontario investor with $150,000 income of 46.41% income, 23.20% capital gains and 26.57% eligible dividends, then, when holding $100 pv of this issue:
$5.25 distribution received.
$2.625 income, keep 53.59% = $1.407
$2.625 CG on disposition, assume immediate disposition, keep 76.80% = $2.016
Total kept after tax = $3.423
Equivalent to pre-tax eligible dividends of $4.662, or 4.66% of the $100 notional par value. Note that the dividend-equivalent yield will increase according to your estimate of the period of tax deferral until the units have sold, and increase according to your estimate of the time value of money in the interim.
REI.PR.A traded 389,944 shares today in a range of 25.05-65 before closing at 25.52-55, 4×8.
Vital statistics are:
Maturity Type : Call
Maturity Date : 2016-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.52
Bid-YTW : 4.82 %
REI.PR.A will be tracked by HIMIPref™ and valued with the assumption that all distributions are taxable as interest. It will be relegated to the Scraps index on credit concerns.