PrefBlog

This post is motivated by a query from Assiduous Reader adrian2, who writes in and says:

Is there any other Canadian security calling itself preferred and distributing ROC?

As it turns out, there is: REI.PR.A and REI.PR.C are reported by RioCan to have the following breakdown of their distribution in 2011:

• Capital Gain: 1.72%
• Foreign Non-Business Income 4.57%
• Other Income 31.24%
• Return of Capital 62.47%

Various implications of this kind of tax treatment were discussed by Tom Kiladze in the Globe:

In RioCan’s case, distributions will be taxed as income, not as dividends. That matters, because income is taxed at a higher rate. But the preferred units will be treated just like RioCan’s regular trust units, so a portion of the distributions will be treated as a return of capital. REITs often distribute more than their net incomes because depreciation skews their bottom lines (property values usually go up, not down), and the amount overpaid allows investors to get a better tax treatment.

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.

What the numbers will look like in the future is left as an exercise for the student.

This entry was posted on Saturday, August 4th, 2012 at 5:38 pm and is filed under Issue Comments, Return of Capital. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.