CapitalSource's entire reasoning for converting to REIT structure was to enjoy significant tax advantages. However, CSE posted an "overall effective tax rate in 2007, expressed as a percentage of consolidated pre-tax GAAP net income, [of] 33.2%." The Company is earnings most of its income within its TRS subsidiaries and not with the tax-sheltered qualified REIT subsidiaries. CSE is basically structured as conglomerate of three separate divisions: 1) a corporate finance TRS, 2) a healthcare net lease REIT, and 3) some sort of structured finance segment. It's a BDC, a healthcare triple net lease REIT, and a poorly performing mortgage REIT all in one. The poorly performing mortgage seems to be bringing the structure down right now. CSE bills itself as a SuperREIT, a hybrid diversified vehicle that can do it all. Unfortunately, the REIT structure is not quite as accommodating as CSE would like for it to be.
In the end,CapitalSource (CSE), a diversified REIT, reporting a disappointing $0.07/share fourth-quarter GAAP loss amidst serious derivative losses, mark-to-market losses on its MBS portfolio, and a growing provision for loan losses.
CSE can't seem to generate enough taxable income to maximize the advantages of being a REIT. Instead of owning up and retaining the excess capital tax-free, CSE chose to keep pumping out dividends and diluting existing shareholders through its direct stock purchase plan -- during one of the worst credit crises in recent history. CapitalSource could have retained the capital and repurchased common shares as a better means of supporting shareholder value.
By their very nature, REITs maximize their value when they can fully utilize their tax-advantaged structure. CapitalSource, meanwhile, reported an effective tax rate of 33.2% for 2007. Being a mortgage REIT is not just about paying a dividend. It's about utilizing a complex structure to deliver returns on shareholder equity.