NEW YORK CITY-As GlobeSt.com reported earlier this year, non-traditional REITs are on the rise. Now, a white paper from Deloitte tracks their growth and reports that over five-year, 10-year and 20-year periods, new-age trusts outperformed their more traditional brethren.
According to Deloitte real estate leader Bob O’Brien, their popularity is manifold, including “access to capital (especially in the unsecured debt market), higher valuations, a single level of taxation and historically better financial performance than traditional REITs and their C-Corp peers.”
The operating and financial hurdles can be high, he notes. “A REIT conversion is a complex process,” the white paper states, “and requires strategic, financial and operational restructuring to comply with regulations.”
Nevertheless, the firm reports an increased interest in investigating the form, which is focused on unlocking the value of a company’s income-producing real estate, including data centers, document storage facilities, timber, cell towers, prisons and billboards.
The concept of a specialty REIT is not one embraced by NAREIT. A spokesperson for the association states simply that, “There are no specialty REITs. There are just REITs. Back in the 1960s, there were no healthcare REITs. They came around because healthcare was becoming a big part of our economy, and real estate is essentially the structure that houses that economy.” He also says that cell tower REITs, well, microwave tower REITs back then, were around in the 1960s.
Deloitte differentiates by defining non-traditional trusts as focusing on “underlying assets with different and unique characteristics compared to the owners of traditional properties.”
So how does a firm go about converting? First, get your priorities straight. “Does the existing business model and structure conform to the REIT qualification guideline?” What organizational changes will be necessary and does the conversion align with the “long-term strategy of the company.” Next, is financial restructuring in the offing? “A company considering the switch needs to evaluate the impact of the REIT distribution requirements. The existing capital structure, expected cash flows, future access to capital and the proportion and form of dividend distribution should be assessed to determine the funding gap.”
Finally comes what O’Brien calls tactical priorities. All of these revolve around regulatory and compliance requirements. Have you done sufficient due diligence? Does the company have the infrastructure in place to monitor the ongoing reporting and compliance requirements? Finally, does the company have a change-management plan?
Of course, the process is much more complicated than indicated here, and Deloitte estimates an 18-to-24-month process after board approval. But, as the white paper indicates, “It is important for a potential convert to understand the actions that can help in a successful conversion and lead to short- and long-term value creation.”