Ackman Warns of REIT Crackdown With Rising Conversions

Bill Ackman, founder of Pershing Square Capital Management LP, said rising conversions to real estate investment trusts among owners of nontraditional property may spur changes that would be harmful to the industry.

New restrictions are likely if too many landlords with property not usually owned by REITs make the conversion, Ackman said today at a conference at New York University’s Schack Institute of Real Estate in Manhattan. REITs, which own such commercial properties as office buildings, shopping centers and warehouses, don’t pay federal income taxes.

“If you push the envelope too much, there will be a crackdown on the REIT industry,” said Ackman, the second- largest investor in General Growth Properties Inc. (GGP), a Chicago- based mall REIT. (BBREIT)

Companies outside of traditional property owners are adopting the REIT structure as investors clamor for stocks that can deliver stable payouts yielding an average of 3.4 percent, according to data compiled by Bloomberg. Low interest rates, meanwhile, are making alternative investments less attractive. Landlords also are changing their status to cut taxes and gain access to capital enjoyed by property trusts.

Geo Group Inc., a penitentiary operator, and American Tower Corp., an owner of communications towers, are among the companies that have converted. CBS Corp. said in January it is planning a conversion for its billboard unit. Casino owner Penn National Gaming Inc. (PENN) announced plans in November to split into two public companies, one a REIT.

Casino Owners

The intent of the original REIT legislation wasn’t for companies such as casino owners to become REITs, Ackman said.

In exchange for not paying federal income taxes, REITs, whose primary income streams are from real estate, are required by the Internal Revenue Service to distribute at least 90 percent of their taxable earnings to shareholders in the form of dividends.

Passing gaming money through the tax-free structure will invite scrutiny of traditional REITs, Jonathan Gray, Blackstone Group LP (BX)’s global head of real estate, said at today’s conference.

Ackman said it would be “absurd” for a company such as Waste Management Inc. (WM) to adopt the REIT structure. Waste Management, the biggest U.S. trash hauler, was the subject of speculation for a conversion in January after Credit Suisse Group AG said investors would benefit from such a move. The Houston-based company said at the time it had no plans to become a REIT.

Waste Management fell as much as 0.9 percent after Ackman’s comments. It closed down 0.2 percent to $39.30.

Share Gains

Gains in shares of REITs may encourage more companies to adopt the structure, Omotayo Okusanya, a Jefferies LLC analyst, wrote in a report yesterday. Conversions may be possible for companies that own power plants and other energy-related assets, as well as farms, vineyards, railroads, bridges, ports, highways and even parking garages and cemeteries, Okusanya said.

Seven of eight companies that became REITs in the bull market since March 2009 rose more after their conversions than another industry gauge, the MSCI U.S. REIT Index, according to Okusanya. Corrections Corp. of America, the largest U.S. owner of prisons, was the exception.

To contact the reporters on this story: Brian Louis in Chicago at blouis1@bloomberg.net; Oshrat Carmiel in New York at ocarmiel1@bloomberg.net

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net

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