REIT Spin Magic: So Much For The Big Mac REIT
- I was once fascinated with the “trick” that turned an ordinary company into a REIT.
- Before a Congressional tax bill passed a law banning certain tax-free REIT spin-offs, many corporations which own real estate and the operating businesses.
- I am not convinced that Congress made the right move to prevent C-Corp. REIT spins.
Did you enjoy magic at a young age? I did – and was mesmerized at the first sight of a handsome, tux-clad performer on stage (watching on television), sawing a woman in half, making an elephant disappear, or, doing a card trick right in front of my own eyes.
We’ve all had the experience of seeing a really great magic trick, followed by its usual and expected reaction: “How’d they do that?”
These days, I’m still in awe of great tricks, whether from David Copperfield, or Penn & Teller, or even the slightly dangerous (look away!) David Blaine.
But in my special area of interest – commercial real estate investing – originally as a developer, and as an investor and writer, I was once fascinated with the “trick” that turned an ordinary company into a REIT. Namely, C-Corps and their spin offs into REITs.
You may recall that McDonald’s (MCD) was once considering spinning its prized real estate into a REIT vehicle, but the fast food giant elected to maintain its free-standing real estate in a C-Corp. However, Darden Restaurants (DRI) opted to unlock the value in 242 restaurant sites by spinning into Four Corners Properties Trust (FCPT).
By spinning off the real estate into a REIT, Darden was able to monetize its legacy real estate portfolio in a tax-free vehicle (instead of taking the company private). Essentially, Darden opted to alter its capital structure in a way that took advantage of the REIT laws and allow Four Corners to lease back its real estate (to DRI).
Before a Congressional tax bill passed a law banning certain tax-free REIT spin-offs, many corporations which own real estate and the operating businesses – like restaurants, casinos, and retailers – were popular in the REIT sector.
However, the bill forced the hand for companies that wanted to spin-off their real estate into a REIT to be taxed – the distribution of either the real estate or operating assets are no longer tax-free. So now C-Corps that want to consider a REIT structure are no longer tax-advantaged.
I must say, the REIT conversation phenomenon has gotten my attention lately as there have been a growing number of REIT-to-REIT spins (or proposed spins), such as DDR (DDR), Spirit Realty (SRC), Ventas (VTR) – spun out Care Capital (now owned by Sabra), Simon Properties (SPG) – spun out Washington Prime (WPG), Vornado Realty (VNO) – spun out Urban Edge (UE) and JBG SMITH Properties (JBGS).
Remember, REIT to REIT spins are perfectly allowable, and I expect that trend to continue. Lately, these bifurcations have been designed to split up the ugly ducklings (i.e. WPG) from the SWANs (i.e. SPG).
However, the C-Corp. (tax free) REIT spins are not allowed, and I thought it would be interesting to examine the performance of these REITs, which I’ll relate, briefly, in this article (I will soon write a follow up article on the performance of the REIT-to-REIT spins).