One big reason companies desire REIT status is for the favorable tax treatment. Another motivating factor though is that investors are often willing to pay hefty multiples for these types of businesses. In fact, that is one reason that spinning of real estate works so well because the ‘sum of the parts’ valuation really get goosed. The WSJ notes that for these ‘non traditional’ players though, this may not be as simple as it seems. While these companies may have convinced the IRS that they are really in the real estate business, that doesn’t mean real estate investors are ready to jump on board. For example, CBS Outdoor has been followed by media investors for years and there are those who may still view it as such. Traditional REIT investors might be leery of these new players in the space. It would be somewhat ironic for a transaction like a split off, which typically boasts of clarifying shareholder choice, to actually create further confusion for investors.
Of course, there is also the question of whether or not these new REITs will achieve the industry standard multiple. The answer might be no as the WSJ notes that:
Lamar’s price is 12.8 times the low end of its 2014 guidance of adjusted funds from operations per share, a common REIT metric. That compares with average multiples north of 20 times for residential, self-storage and specialty (tower and data-center) REITs.
Of course, these companies aren’t part of any REIT index funds yet, but they might not ever get added. It’s worth noting that there are legitimate differences between the business models of traditional REITs and companies like CBSO. For example, ‘deals with advertisers last anywhere from 30 days to a year, versus seven to 10 years for a mall lease,’ which means these companies face higher exposure to economic cycles.
The WSJ concludes that in the end, it may not matter:
Outdoor ad REITs may never achieve the heady valuations of their traditional property brethren. But with time and education, the benefits of REIT conversion should start to add up. Above all, in an environment of ultralow interest rates where yield is king, these companies certainly know what sells.
Ultimately, I think that makes sense and these are hardly the first ‘non traditional’ companies to make the leap. In fact, so called ‘specialty’ REITs have had periods of outperformance in the past. It will be interesting to monitor the education process though and see if these companies can deliver the expected benefits to investors.
Disclosure: Author holds no position in any stock mentioned.