WSJ: Beware of Non-Core Real Estate Companies Converting to REITs

Monday, 29 Oct 2012 07:54 AM

By Dan Weil

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Investors are snapping up real estate investment trusts (REITs) in a search for yield, leading companies whose primary focus isn’t real estate to try converting into REITs.

Be wary of these companies, says Wall Street Journal columnist Jason Zweig. They may hit the skids.

Corporations seeking the conversion include operators of cell-phone towers, cloud-computing data centers, prisons, billboards and document-storage facilities.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

Companies changing to REITs must convince the IRS that investing in real estate is their main business. They also are required to distribute at least 90 percent of their taxable income as dividends. In return they receive an exemption from federal income tax.

Over the next several years, 10 to 20 companies could switch to REITs, Scott Westphal, an analyst at Cornerstone Real Estate Advisers, tells The Journal.

"There will be some great opportunities coming in," he says. "Unfortunately, some of these sectors have a checkered past."

In the late 1990s, prisons, cell towers and golf courses converted into REITs, hitting some investors with losses of more than 90 percent.

Zweig recommends a diversified index or exchange-traded traded fund to invest in REITs.

That certainly is wise advice, but discerning investors might find a few good opportunities. Many analysts are bullish on the cell-phone tower companies, for example.

That’s because the cell tower operators are essentially toll collectors on the cell-phone super highway, taking payment from carriers that constantly seek to broaden their coverage.

The author of this story owns shares of American Tower, a cell tower operator that has converted into a REIT.


Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

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