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Market Price (3/25/2016): $21.00/share; ST-Target: $21/share; NIV: $33/share
REIT tax advantage is an illusion
- One advantage of converting a utility into a real estate investment trust (REIT) is the supposed tax advantage in that the REIT no longer pays taxes but through rates, taxes continue to be collected.
- One argument that was put forth to justify for collecting money for taxes that are not paid by the company from consumers is that regulators routinely allow for collection of taxes that are not paid by other forms of pass-through entities such as limited partnerships.
- We are of the opinion that taxes being collected by other pass-through entities is for the taxes that would be paid by the recipients of the distribution to ensure after-tax equivalency across corporate structures.
- We would also argue that the after-tax “return-on” portion of the pass-through distributions is competitive with other forms of business entities, but the “tax-advantage” comes in the form of the “return-of” capital portion, which, by definition, would be free from tax burdens.
- Therefore, we’d argue that taxes collected by the Oncor-REIT would be to allow for tax-equivalency as compared to other business structures, but not to reward investors with cash that they did not earn.