City Office REIT's 2024 Tax Treatment: A Closer Look at Common and Preferred Stock Distributions

City Office REIT, Inc. (NYSE: CIO) recently announced the tax treatment of its 2024 distributions for both common stock and 6.625% Series A Cumulative Redeemable Preferred Stock holders. The tax information provided offers valuable insights into the REIT's financial health and the attractiveness of its securities to income-focused investors. This article will delve into the key aspects of the tax treatment disclosure and its implications for investors.



Common Stock Distributions
For common stockholders, the quarterly distributions of $0.10 per share were predominantly classified as return of capital (91.461%), with only 8.539% qualifying as ordinary dividends. This high return of capital component has significant implications for both shareholders and the REIT itself.

From a tax perspective, return of capital distributions reduce the shareholder's cost basis in the stock rather than being immediately taxable. This effectively defers taxes until the shares are sold. However, this structure typically indicates that the REIT's taxable income is substantially lower than its cash distributions, which could signal underlying operational challenges in generating sufficient taxable income from its property portfolio.

For example, in 2024, the ordinary dividend component of the common stock distributions was only $0.008539 per share, while the return of capital component was $0.091461 per share. This suggests that the REIT's taxable income is significantly lower than the total distributions paid to shareholders.

In the long term, if the REIT continues to distribute a high proportion of return of capital, it may face challenges in maintaining its dividend payouts, as the taxable income generated from its property portfolio may not be sufficient to support the distributions. This could lead to a situation where the REIT is unable to sustain its dividend payments, which would negatively impact the financial health of the REIT and the value of its shares.

Preferred Stock Distributions
In contrast, the preferred stock distributions maintained a 100% ordinary dividend classification. This divergence between common and preferred stock treatment is particularly telling - it suggests that the REIT is prioritizing maintaining the preferred dividend coverage while potentially struggling to generate enough taxable income to fully support the common dividend as ordinary income.

For investors, this tax treatment structure requires careful consideration. While the high return of capital component offers immediate tax advantages, it may indicate potential sustainability concerns regarding the common stock dividend level. The consistent ordinary dividend treatment of preferred shares provides more predictable tax treatment but also highlights the senior position of these securities in the capital structure.



Conclusion
City Office REIT's 2024 tax treatment disclosure reveals a notable distribution structure that warrants careful analysis. For common shareholders, the quarterly distributions of $0.10 per share were predominantly classified as return of capital, which may indicate underlying operational challenges in generating sufficient taxable income from the property portfolio. In contrast, the preferred stock distributions maintained a 100% ordinary dividend classification, suggesting that the REIT is prioritizing maintaining the preferred dividend coverage. Investors should carefully consider the tax treatment structure and its potential implications for the REIT's financial health and dividend sustainability.