Jana Partners LLC, the activist hedge fund run by Barry Rosenstein, bought shares of Copart (CPRT) Inc. in a bet the car auction company may convert into a tax- effficient real estate investment trust.
Shares of Copart, which is based in Fairfield, California and helps auto suppliers and insurance companies process and sell salvage vehicles, are attractively priced and may rise should the company convert to a REIT, Jana said in a fourth- quarter letter to investors obtained by Bloomberg News.
“We see an attractive asset trading at a reasonable price with the potential for significant value to be unlocked were CPRT to convert to a REIT,” Jana said in the letter, referring to the ticker symbol under which Copart shares trade. “Our research suggests that the vast majority of CPRT’s earnings can be classified as qualifying real estate income.”
REITs, whose primary income streams are from real estate, don’t pay federal income taxes. In exchange, they’re required by the Internal Revenue Service to distribute at least 90 percent of their taxable earnings to shareholders in the form of dividends. Excluding mortgage REITs, property trusts have raised record amounts of cash through equity and debt sales in the past three years as investors seek yields higher than those offered by securities such as U.S. government notes.
To qualify as a REIT, a company has to invest at least 75 percent of its assets in real estate and obtain 75 percent of its gross income from rents or interest on mortgages from financing property, according to the National Association of Real Estate Investment Trusts, a Washington-based trade group.
Charles Penner, a partner at Jana, declined to comment on the letter.
Companies from prison operators to data centers are expanding the ranks of tax-saving REITs. Earlier this month, CBS Corp. shares surged the most in more than a year after the company said it will convert its outdoor advertising unit into a REIT and seek a buyer for the European and Asian parts of that business.
Other companies that plan to become REITs include Corrections Corp. of America, a Nashville, Tennessee-based prison operator; Equinix Inc. (EQIX), a data-center operator based in Redwood City, California; Ryman Hospitality Properties Inc., based in Nashville and formerly known as Gaylord Entertainment Co.; and Lamar Advertising Co. the Baton Rouge, Louisiana-based billboard owner.
The IRS has determined that billboards are real property, opening the door for Lamar to become a REIT, Sean Reilly, the Baton Rouge, Louisiana-based company’s chief executive officer, said at a Goldman Sachs Group Inc. conference in September.
Jana also bought shares of off-shore drilling contractor Noble Corp. (NE) on the expectation that the Geneva-based company will expand its fleet of ultra-deep-water rigs, which would contribute to earnings growth of 60 percent this year and 50 percent in 2014, the firm said in the letter.
Jana said it urged QEP Resources Inc., the Denver-based natural gas and oil exploration and production company, to form a master-limited partnership, a move the company announced earlier this month. QEP expects to sell a minority interest in the partnership in an initial public offering and raise $300 million to $400 million in gross proceeds. An MLP is publicly traded and taxed as a partnership.
“We established our position at an attractive cost basis and worked throughout November and December to communicate to management the optionality and value creation to be captured through the successful execution of an MLP growth strategy,” Jana said in the letter. “Much to our satisfaction, on January 7th, QEP announced its intention to form an MLP and to file regulatory documents for an IPO by the second quarter of 2013.”
Jana Master Fund rose 23 percent last year, the firm said in the letter. Jana Nirvana Fund rose 33 percent in 2012.
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