RioCan Real Estate Investment Trust took some investors by surprise this week when it launched a $100-million bought deal of rate-reset preferred trust units, the firm's equivalent of a preferred share. It was the first issue of these securities by any Canadian REIT.
The deal made a lot of sense because retail investors have been gobbling up preferred shares, prompting Brookfield to sell $215-million more of them Wednesday. But in the rush to buy RioCan's, investors may not have realized the distributions paid out are taxed a bit differently than corporate prefs.
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.
If all of that is too jargon-y, the key takeaway is that the RioCan's distribution is about the same as a pref share that yields 4.82 per cent.