It's Another REIT Spin-off. Is That Really a Good Thing?

CHARLOTTESVILLE, VA—Another day, another company that has decided to spin off its real estate assets into a REIT. This time it is Windstream Corp., a telecom provider based in Little Rock, AR. The company has announced it plans to spin off its fiber and copper network into a REIT, and then lease back the assets.

As described by Windstream, the deal sounds great. The move will shave about $3.2 billion from its debt while the new REIT will earn $650 million a year in income from the master lease. In addition, the Internal Revenue Service is on board, with Windstream having received a private letter ruling from the agency.

Fitch Ratings approves of the spinoff, at least for Windstream, noting the improved free cash flow will improve Windstream's credit profile. Also, the company will be able to invest in more advanced technologies as a result and its debt leverage will improve, to boot.

However, new research from SNL Financial suggests that the recent REIT spinoffs are not performing as well as might be hoped. There have been five REIT spinoffs since the start of 2013, for an aggregate current market cap of more than $8.81 billion. However, only one of those spinoff companies has outperformed its parent company since completion, and none have outperformed the broader REIT market, SNL concluded.

That REIT is Gaming and Leisure Properties' November 2013 spinoff. The casino REIT has generated a total return of 6.7% since then, compared to a total return for parent company Penn National Gaming of negative 16%.

The SNL U.S. REIT equity index provided a total return of 12.8% across the same time period, besting Gaming and Leisure Properties' return by 6.1 percentage points, SNL also pointed out.

This is not to single out Windstream; another REIT spinoff to watch is Vornado Realty Trust, which announced its own plans this year to narrow its focus on office assets in New York City and Washington, DC, as well as high-value Manhattan street retail assets. That spinoff is expected to be completed in the second half of 2014 and it too will be subject to the same market forces that have shaped the outcome of earlier REIT spinoffs.

As SNL notes, most have not gone well, at least from shareholders' perspectives.

According to the report:

• Washington Prime, Simon Property Group's REIT spinoff, has generated a total return of negative 7.9%, compared to 3.7% and 3.4% for Simon and the broader REIT market, respectively.

• The spinoff of Ashford Hospitality Prime from Ashford Hospitality Trust has provided shareholders with a return of negative 19.1%, compared to 43.7% for the parent company and 17.3% for the SNL U.S. REIT equity index.

• Starwood Property Trust's spinoff of Starwood Waypoint Residential Trust has provided returns of negative 13.7%, compared to 4.6% for Starwood Property Trust and 16.7% for the SNL U.S. REIT Equity Index.

• CareTrust REIT's spinoff from The Ensign Group only completed last month. Since then, CareTrust has provided investors with a total return of negative 17.3%, compared to 27.6% for Ensign Group and 2.7% for the broader REIT market.