Stock Spinoffs

Will IRS REIT Review Affect Upcoming Spinoffs?

Spin Doctor
Delays could be on the horizon for CBS’ (CBS) upcoming North & South American outdoor advertising spinoff. The IRS has apparently formed an ‘internal working group’ to study its current standards of what type of companies can qualify for REIT status. The news came out late last week when both Lamar Advertising (LAMR) and data storage company Equinix Inc (EQIX) revealed that their own REIT conversion plans might be delayed.

REITs have advantageous tax rules which make them very attractive from the corporate side. Additionally, with investors clamoring for yield amidst microscopic interest rates, REITs, which pay out over 90% of their earnings as dividends, have become very ‘in vogue’ investments demanding premium valuations. Not surprisingly, companies in areas that haven’t traditionally been considered REITs have started applying for the designation. The IRS must rule on these matters so any change in the agency’s thinking could derail these moves.

According to the WSJ article linked to above though, ‘it would be a significant departure from its past practice’ if the IRS were to rule that non-traditional real estate companies would no longer qualify as REITs. The article also notes that most analysts expect CBS’ spinoff to proceed with or without REIT status, but that ‘several Wall Street analysts said CBS is likely to win approval to convert its outdoor business into a REIT, but the process could be delayed because of the agency’s wider review.’

So there you have it. CBS’ spinoff is still moving forward and still likely to gain REIT status for its spinoff…but it might take a bit longer. For investors in spinoffs, a little more time is nothing new. It is worth noting that losing REIT status would likely hurt the ensuing valuation.

For some additional background information on CBS’ proposed transaction, click here.

As a side note, I don’t believe this will have any affect on Penn National Gaming’s (PENN) upcoming property spinoff as the company has already received a private letter ruling from the IRS regarding its tax status.

Disclosure: Author holds no position in any stock mentioned

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