Newcastle Investment Corp., now known as Drive Shack Inc., chose to pivot from simple real estate ownership and was forced to convert to a regular corporation. Quality Care Properties Inc. is following suit. So far, few if any companies that still qualify as REITs have made the leap.
Isn’t This Backwards?
Conversion has generally gone in the other direction, with corporations flocking to the REIT structure. The trend has tapered off in recent years as the Internal Revenue Service has cracked down on spinoffs. That didn’t stop Alexander & Baldwin Inc., which focuses on Hawaiian properties, from becoming a REIT last year. The change in tax status spurred a one-time special dividend to shareholders totaling $783 million.
Even in the wake of the new tax law, REITs tempted to become ordinary corporations may be wary that the tax rate could change again. Still, a company that converts can go back to the REIT structure after five years. In fact, Third Avenue said, once sufficient investments have been made and assets put to new purposes, that may be the best course.
Another concern is the stock-price decline that would probably follow a company’s removal from REIT indexes and the universe of dedicated REIT investors. Third Avenue argues that any short-term declines are likely to be countered by substantial long-term gains if the conversion makes sense for the company.
Wolf and Dobratz admit their proposal is “no doubt a contrarian idea” but say it sometimes takes a bold move to generate outsize returns.
This article was provided by Bloomberg News.