With interest rates having been low for as long as many people can remember, any investment that pays significant income to its investors carries a big premium. As you'd expect, some companies are doing their best to take advantage of that demand by putting themselves in a better position to deliver exactly what investors want.
Real estate investment trusts have been one of the most popular income-oriented investments lately. Their tax-efficient corporate structure allows them to reap some big benefits over regular companies, but that favorable tax status comes with some restrictions. Still, as a recent article in Barron's notes, a number of companies that currently don't qualify as REITs are looking to jump through the necessary hoops to become REITs -- and in the process could end up making huge payouts to their current shareholders.
Below, I'll give you the names of companies thinking about becoming REITs. But first, let's take a look at the history of companies that have already completed their conversions to REIT status.
Looking back at REIT conversions
Back in late 2009, forest-products supplier Weyerhaeuser (NYS: WY) decided to become a REIT. Investors had discussed the potential move for years, as the rising popularity of timberland as an alternative investment had led to several competitors making the move, including Plum Creek Timber (NYS: PCL) back in 1999.
The benefit of REIT status for Weyerhaeuser is that its corporate tax bill largely disappeared overnight. Rather than paying corporate tax, REITs pass through all their income to their shareholders, who then include that income on their own personal tax returns. Since its conversion, Weyerhaeuser has enjoyed substantial reversals of past corporate income-tax provisions that have boosted its earnings.
But Weyerhaeuser's move came with a big requirement: The company had to make a giant special dividend distribution, representing all of its past retained earnings. Unlike Plum Creek a decade earlier, Weyerhaeuser's special dividend was massive -- more than $26 per share for a stock that was then trading at $42. The payout didn't make shareholders rich, as the share price immediately fell by roughly the $26 amount of the special dividend. But it did provide a lot of income to anyone who needed it.
More recently, companies beyond the timber area have converted to REITs. Sabra Health Care (NAS: SBRA) converted in late 2010, spinning off from Sun Healthcare. Sabra now yields more than 9%. American Tower (NYS: AMT) is one of the most recent, and it paid a special distribution of $0.35 per share in December. The mobile-transmission tower company strategically waited until it had used up all its tax losses before converting, timing it so that it took maximum advantage of the potential tax benefits of REIT status.
Given the obvious tax benefits, many companies are considering making the move to become REITs. Because all a company needs is a substantial connection to a real-estate related activity, potential candidates run the gamut from prison owner-operators Corrections Corp. (NYS: CXW) and GEO Group to American Tower competitor SBA Communications and even Iron Mountain, which would likely have to get rid of its digital business in order to qualify for REIT status. The Barron's article cites other possible contenders, including data warehouse operators Equinix and Cincinnati Bell.
The benefit to the company of becoming a REIT is fairly obvious, but from a shareholder perspective, the rewards can be more tangible. In general, the more in profits that a company has retained rather than paying out in dividends throughout its existence, the greater a potential special dividend will be. Given that investors have tended to bid up shares of companies announcing special dividends, getting in before a firm announcement could give you the chance at beating the rush and enjoying some additional share-price appreciation to go with a nice chunk of cash.
The REIT move?
Of course, whether a company becomes a REIT or remains as a regular corporation, it still has to be profitable in order to be a successful investment. But with tax benefits beckoning, profitable businesses have every incentive to move away from the double-taxation of corporate status and instead become REITs -- and the move could well give shareholders some extra gains as well.
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At the time this article was published Fool contributor Dan Caplinger doesn't need much dividend income now, but he knows his time will come. You can follow him on Twitter @DanCaplinger. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Sabra Health Care REIT and Weyerhaeuser. Motley Fool newsletter services have recommended buying shares of American Tower and Corrections Corporation of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy has the right stuff.
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