Shares of Civeo Corporation were down more than 45% on Monday.
Civeo, which provides housing accommodations to oil-drilling companies, announced on Monday that it would not pursue a conversion into a real estate investment trust, or REIT.
Investors were not thrilled.
The company also announced that it would redomicile to Canada under a “self-directed redomiciling,” which is allowable under US tax law if a company has “substantial business activity” in the country to which it is moving.
Kind of like an inversion, but not exactly.
But the big news is that the company decided not to pursue a REIT structure.
A REIT trades on an exchange and generates income through rent collection and investment in additional properties or mortgages.
REITs find favour with some investors because they are required to pay out at least 90% of their taxable income in the form of dividends.
In opting not to pursue a REIT structure, the company said in a statement:
“The board and its advisers evaluated the potential effects of a REIT conversion on earnings, valuation and operational flexibility and determined that redomiciling the company to Canada offers a superior result to a REIT conversion. The primary factors considered include:
- The fact that over 90% of Civeo’s earnings are generated outside the United States, which is not typical for companies that pursue a REIT conversion. Conversion to a REIT for Civeo would not reduce taxes paid by the company in Canada and Australia.
- The significant cash expenditures that would be incurred in connection with a REIT conversion. The company would incur cash expenditures of approximately $US720 million in order to fund tax payments of over $US300 million, the cash portion of a required earning and profits distribution and transaction costs, which collectively would meaningfully increase leverage metrics.
“These key factors result in the REIT conversion being net present value negative, which the board took into account in concluding that redomiciling the company to Canada offers a better alternative. Further, the company’s C-corp structure offers superior operational and financial flexibility coupled with a lower tax rate under the migration transaction without the significant upfront costs.”
Civeo, which was spun out from Oil States International in June, also said it expected sequentially lower results in the fourth quarter.
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