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Contrarian Ideas: Will New Tax Law Entice REITs to Convert to C Corp?
A new U.S. tax law could serve as a stepping stone for REITs to abandon their tax-free structure, to meet pressing capital needs and consider converting to a regular C corp. While the status does afford REITs access to a distinct set of investors, some fund portfolio managers believe the time could be right to make a change.
Third Avenue Real Estate Value Fund portfolio managers Jason Wolf and Ryan Dobratz indicated in a letter to investors that for some REITs the conversion would be a way to “maximize the value for shareholders over the long term.”
Regulations and dividend payment requirements often force REITs to sell assets, or explore volatile capital markets to finance expansion and meet other needs. They could retain earnings for capital expenses or use extra cash to buy back stock if they were a regular corporation. Those can be complex considerations for some REITs, especially if they are trading at a discount to NAV because of such factors as rising interest rates, note Wolf and Dobratz.
The sharp decline in the corporate tax rate from 35% to 21% would make the transition less jarring than before. And Wolf and Dobratz point out that “certain REITs with significant development, redevelopment and other capex needs could undoubtedly benefit from de-REITing.”
For comments, questions or concerns, please contact Dennis Kaiser
