NEW YORK CITY--Recent guidance from the IRS and the passage of the Protecting Americans from Tax Hikes Act of 2015 may make future REIT spin-offs less likely but are unlikely to derail REIT plans already on track, Fitch Ratings said Thursday. That being the case, the release of the ratings agency's special report on "the state of REITization in the US" coincided with MGM Resorts International's announcement of key hires for the management of MGM Growth Properties—a prime example of the new path that a number of issuers are taking.

Instead of spinning off MGP as a standalone REIT, the parent company is contributing properties to a new subsidiary. The idea in this scenario is that a portion of the subsidiary would be sold or granted to third-party investors, which in theory would eventually trade the subsidiaries at real estate multiples. It's a tack likely to also be taken by Macy's Inc., which earlier this month reaffirmed its interest in monetizing its owned real estate.

Going this route does not involve a spin-off, nor does it require a private letter ruling from the IRS. The agency issued guidance this past September on tax-free spin-offs, including REIT spin-offs in which one of the post spin-off entities is not a REIT and in which the entity that elected to be a REIT pre-spin has not been one for a "substantial period of time." Accordingly, the IRS said it would not give its blessing to such spin-offs with a PLR except under "unique and compelling" circumstances.

The PATH Act grandfathered would-be REIT spin-offs that had submitted PLR requests prior to Dec. 7, 2015, and Fitch surmises that Boyd Gaming and Hilton Worldwide, which are considering such spin-offs, got in under the wire. Even so, Fitch says "it is uncertain the IRS will issue grandfathered rulings post-PATH passage and, if they do, how long it will take and whether the level of scrutiny will change" relative to what the IRS gave the PLR requests of Penn National Gaming and Darden Restaurants Inc.

Fitch believes companies looking at REIT transactions mainly to take advantage of the multiple arbitrage may wait "given the increasing long-term rates (which tend to pressure real estate values), more volatile debt markets (particularly high yield) and the recent declines" in the stock of a previous REIT spinoff, Gaming & Leisure Properties, which spun off from Penn National Gaming in an OpCo/PropCo arrangement. "Ultimately, Fitch believes the merits of a REIT transaction will hinge on company-specific factors, such as the current equity market implied valuation of assets, strategic rationale, amount of taxable net income generated, yield curve assumed, debt structure and the taxability of the contemplated transaction."

Issuers will likely pursue spin-offs only with a PLR in hand or, alternately, follow a different path such as the one taken by MGM, says Fitch. "We understand that executing a spinoff without a PLR could expose the issuer and its shareholders to potentially severe tax consequences if the IRS deems the distribution a taxable event."