Prisons to Data Centers Expand Ranks of Tax-Saving REITs

Prison Owners to Data Centers Seek Tax Shelter by Becoming REITs
Corrections Corp. of America, which operates La Palma Correctional Center in Eloy, Arizona, has also asked for a private letter ruling from the IRS as part of its conversion plan. Photographer: Joshua Lott/Bloomberg

American Tower Corp.’s stock has climbed 21 percent since it converted to a real estate investment trust at the beginning of the year, making it the second-biggest REIT in the U.S. Unlike most REITs, including No. 1 Simon Property Group Inc., it doesn’t own shopping malls, office buildings, apartments or warehouses.

American Tower owns 21,592 cell-phone antennas that are used by wireless carriers throughout the country. The Boston-based company is one of a growing number of landlords for nontraditional properties such as prisons and data centers that are switching to REITs, a group whose shares have soared 59 percent in the past three years.

“It’s in many ways a validation of the success that REITs have had,” said Adam Markman, a managing director at Green Street Advisors Inc., a Newport Beach, California-based real estate research firm. “The current evidence is the pace of conversions isn’t slowing. The more success that we have, the more likely it is we’ll see additional activity.”

Companies are adopting the REIT structure in part because investors are clamoring for stocks that can deliver stable payouts yielding an average of 3.5 percent amid record low interest rates, according to data compiled by Bloomberg. They are also changing their status to eliminate corporate income taxes and take advantage of the access to capital enjoyed by property trusts.

No Taxes

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 such securities as U.S. government notes.

At least seven companies are planning to or considering becoming REITs. Should the firms convert, the number of data-center property trusts could increase to five from three, and it would mark the return of prison REITs.

“There’s a capital-markets play to it, and there’s a tax play,” Robert O’Brien, the leader of Deloitte & Touche LLP’s U.S. real estate practice, said in a telephone interview. “The capital-markets aspect of it is really driving it today.”

Equity REITs -- trusts that own property rather than investing in real estate debt -- have raised almost $150 billion through equity and debt offerings from the beginning of 2010 through Oct. 4 of this year, the most in a three-year period in at least 12 years, and about as much as the funds raised in the previous five years combined, according to data from SNL Financial, a research firm based in Charlottesville, Virginia.

Property Buyers

Publicly traded REITs and real estate operating companies ranked third among buyers of U.S. real estate in the first half of the year at $12.2 billion, following private buyers at $40 billion and institutional investors and private equity funds at about $30 billion, according to New York-based research firm Real Capital Analytics Inc.

Geo Group Inc., a penitentiary operator, and Iron Mountain Inc., a document and data-storage company, are among the companies planning to become REITs. The proposed conversions come amid a 13 percent gain in the Bloomberg REIT Index this year, compared with a 14 percent increase in the Standard & Poor’s 500 Index.

Pablo Paez, vice president of corporate relations at Boca Raton, Florida-based Geo Group, and Dan O’Neill, a spokesman for Boston-based Iron Mountain, both declined to comment.

REIT History

Geo Group’s history involves a property trust. It bought CentraCore Properties Trust, a prison REIT, in 2007 for $391 million, according to data compiled by Bloomberg. When the deal was announced, CentraCore owned 13 correctional facilities in nine states.

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. REITs sell equity and debt to fuel purchases and growth because of the requirement that they pass income to shareholders and not retaining most of their earnings.

“If you’re going to be a public real estate company, the vehicle of choice is definitely the REIT vehicle,” Mark Decker, managing director and head of the real estate investment banking group at BMO Capital Markets in Chicago, said in a telephone interview. “If you’re a real estate company and you’re trying to grow, it’s all about access to capital.”

Setting Record

U.S. REITs will set or come close to setting a record for raising capital this year, said O’Brien of Deloitte & Touche. This year through Sept. 28, U.S. equity REITs raised $41.1 billion, a 22 percent increase from the year-earlier period, according to SNL Financial.

REITs’ strong total returns have helped attract investors when the companies raise money through the capital markets, said Markman of Green Street.

Other companies that plan to become REITs include Equinix Inc., a data-center operator based in Redwood City, California, whose shares have surged 89 percent this year. Equinix said Sept. 13 that its board approved a REIT conversion plan, and the company plans to seek an IRS ruling by the end of the year. If successful, the company will become a REIT in 2015, joining data-center REITs DuPont Fabros Technology Inc., Digital Realty Trust Inc. and CoreSite Realty Corp.

Shareholder Value

“We have already seen several of our peers in the data-center industry operate under a REIT structure, and we believe that this tax-efficient structure will enhance shareholder value,” Equinix Chief Financial Officer Keith Taylor said in an e-mail.

Cincinnati Bell Inc., a telephone and wireless company, plans to spin off its data-center operations into a publicly traded REIT, to be called CyrusOne Inc., according to the Cincinnati-based company. CyrusOne filed a registration statement for an offering with the Securities and Exchange Commission on Aug. 8 and plans to qualify as a REIT for its taxable year ending Dec. 31.

Telephone calls seeking comment from John Caulfield, a spokesman for Cincinnati Bell, weren’t returned.

American Tower has a stock-market value of $28.7 billion, making it the largest U.S. REIT after Indianapolis-based Simon, which has a market capitalization of $47.3 billion.

Leah Stearns, investor relations director at American Tower, didn’t return phone calls seeking comment.

Prison Company

Corrections Corp. of America, a Nashville, Tennessee-based prison operator, has asked for a private-letter ruling from the IRS as part of its conversion plan. Steve Owen, a spokesman for Corrections Corp., declined to comment beyond a May company statement that it was considering conversion.

Other companies going through the conversion process are landlords with more typical REIT assets. New York-based W.P. Carey Inc. -- an owner of office buildings, self-storage, retail and warehouses -- completed the process on Sept. 28. As part of the change, W.P. Carey merged with one of its affiliates, a non-traded REIT.

Ryman Hospitality Properties Inc., based in Nashville and formerly known as Gaylord Entertainment Co., plans on electing to be taxed as a REIT on Jan. 1, after selling the Gaylord brand and rights to manage four Gaylord resorts to Marriott International Inc. for $210 million. Ryman continues to own the properties.

Billboard Owners

A new category of REIT may emerge as well. Lamar Advertising Co., the Baton Rouge, Louisiana-based billboard owner, is considering a conversion. 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 on Sept. 20.

“We’re generating more cash flow than we’re redeploying into the business,” said Buster Kantrow, a Lamar spokesman. The company is in the “early stages” of considering a REIT conversion, he said. “We’re in a position to think about returning cash to shareholders.”

The company will start becoming a “significant federal taxpayer” beginning in 2014, Reilly said at the conference. The company is running out of “net operating loss carry forwards,” which allow a company to reduce its taxes. When those are depleted, the company will have taxable income, and converting to a REIT would alleviate the burden.

‘Shielding Taxes’

“It’s a great idea,” Brett Harriss, an analyst at Gabelli & Co. in Rye, New York, said in a telephone interview. “By shielding taxes you’re going to get a big valuation uplift, just because you’re not paying taxes anymore.”

Should Lamar go forward with a conversion, Clear Channel Outdoor Holdings Inc. and CBS Corp., which owns billboards, “might not be far behind,” Harriss said. He has a buy rating on Lamar. CBS, also the owner of the most-watched television network, could spin off its outdoor-advertising business and make it REIT, Harriss said.

“What Lamar did was very interesting,” CBS Chief Executive Officer Leslie Moonves said at the Goldman conference. A REIT conversion is “something that we are potentially looking at,” he said, and “it might be a good plan for us as well.”

Dana McClintock, a CBS spokesman, declined to comment further. Wendy Goldberg, a spokeswoman for Clear Channel, also wouldn’t comment.


Becoming a REIT is not without possible risks, including changes in tax laws or tightening of the capital markets, said Markman of Green Street. Converting is a time-consuming commitment by a company, taking up the attention of senior management, he said.

“It’s interesting to see that these are not traditional major food groups in terms of real estate sectors,” Markman said. “How far can that go? Those are interesting questions that people are asking.”

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