CapitalSource to Drop REIT Status

CapitalSource of Chevy Chase will cease to be a real estate investment trust next year because managing its portfolio of mortgage-related investments would be "imprudent and perhaps impossible," the company said Thursday.

CapitalSource said in a filing with the Securities and Exchange Commission that the decision by its board of directors to abandon its status as a REIT would pave the way toward its strategy of becoming a bank.

There are certain tax benefits to being a REIT. But CapitalSource has traditionally maintained that status by investing in certain mortgage securities, including agency securities, which are pools of mortgage investments issued by finance giants Fannie Mae and Freddie Mac.

"The Board determined it would be imprudent and perhaps impossible to maintain a large compliance portfolio of residential investment assets in 2009 based on unprecedented conditions currently in the credit markets and the conditions anticipated to exist next year," CapitalSource said in a statement.

The company said it would look much like it did in 2006, before it became an investment trust, only with lower debt levels. CapitalSource will remain an investment trust through the year and will pay dividends on its shares in the fourth quarter and in 2009, the company said.

Earlier this month, CapitalSource delayed the initial public offering of its health-care REIT, CapitalSource Healthcare REIT, due to the market's volatility.

The decision to cease being an investment trust does not preclude it spinning off the health-care business as a separate investment trust next year, CapitalSource said.

By Alejandro Lazo  |  October 30, 2008; 6:50 PM ET  | Category:  Economy Watch
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