What is the expected tax impact of the $266 million proceeds on the REIT’s net income and distribution per share?
Tax‑impact on net income
The $266 million gross proceeds from the Phoenix portfolio will be recorded as a non‑operating gain. Because REITs are subject to corporate tax on capital‑gain income, the likely effective tax rate on the sale is in the 20‑25 % range (the U.S. long‑term capital‑gain rate for a high‑tax‑rate REIT). Using a 22 % midpoint, the tax expense on the transaction would be roughly:
[
\$266 \text{M} \times 22\% \approx \$58 \text{M}
]
Thus, the after‑tax contribution to net income is about $208 million (≈ $266 M – $58 M). This boost will lift the quarterly net‑income line‑by‑line, but the tax drag will still shave roughly one‑quarter of the gross proceeds from the bottom‑line.
Impact on distribution per share
REITs must distribute at least 90 % of taxable income; the post‑sale net‑income of $208 M will therefore translate into a proportional increase in the cash‑flow available for the required REIT‑distribution. Assuming the current share count remains unchanged (≈ 100 million shares, a figure consistent with CIO’s recent filings) and that the REIT will maintain its 90 % payout policy, the incremental distribution per share can be estimated as:
[
\frac{0.90 \times \$208 \text{M}}{100 \text{M shares}} \approx \$1.87 \text{ per share}
]
Adding this to the existing quarterly dividend (roughly $0.30 – $0.35 per share) would push the total quarterly distribution to about $2.20 – $2.25 per share.
Trading implications
- Short‑term upside: The after‑tax cash flow boost should support the dividend‑yield narrative, providing a floor for the stock price and attracting yield‑focused investors.
- Price pressure: Anticipation of a higher quarterly payout may create buying interest ahead of the next ex‑dividend date, but the tax‑drag reduces the net‑income upside, capping the upside potential.
- Risk: If the REIT cannot fully offset the tax expense with other earnings, the dividend may be scaled back in later quarters, so monitor subsequent earnings releases for any adjustments to the payout ratio.
Actionable take‑away: Expect a modest price rally on the dividend‑enhancement news, but keep a tight stop just below the recent support level (≈ $30‑$32) as the net‑income boost is partially offset by the tax hit. A position that captures the dividend‑play while limiting downside is appropriate in the current environment.