My colleague David Sterman EQIX), which
owns facilities that house Internet traffic equipment. That may not
sound interesting by itself, but it was a rather unusual move the
company recently made that caught my attention.
Equinix decided to become a real estate investment trust
(REIT) , which offers significant advantages for companies that own
alot ofreal estate . And it's also creating opportunity for income
investors.
Lured by outsized returns in the REIT sector, a number of
companies that own significant amounts of real estate are taking
the plunge and converting to REITs. This benefits income investors
primarily because of the unique REIT structure, which requires
these firms to pass along at least 90% of their income directly to
shareholders in the form ofdividend payments. By doing so, REITs
bypass federaltaxes and the result is that REIT dividends are only
taxed at the individual level of shareholders.
Because of this unique structure, REITs can generallyoffer much
richer yields than the overallmarket .
Most REITs own traditional types of real estate such as shopping
centers, apartments and office buildings, but an increasing number
of companies that own different types of properties are converting
to REITs.
Investors who purchased Equinixshares last September, when
theboard of directors approved the plan to become a REIT, are
sitting on a 13% capital gain right now. Investors drove up the
share price knowing that lower taxes would leave Equinix with
moremoney to distribute to shareholders.
Several firms are following Equinix's lead and hoping to lock in
similar gains through a REIT conversion. One way investors can play
this trend by identifying these companies during the conversion
process and taking advantage of a special one-time dividend these
companies must pay before the change to REIT status.
Here is a look at four recent or upcoming REIT conversions.
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1.
Corrections Corp. of America |
Corrections Corp. of America (
CXW
)
converted to a REIT effective Jan. 1. Corrections Corp. is
the nation's largest operator of private prisons. The company
operates 66 correctional and detention facilities, and has a
total capacity of about 91,000 beds in 20 states and the
District of Columbia.
Correction Corp.'sfunds from operations (FFO) per share, a
key REITcash flow metric, grew 7% to $2.34 in 2012 from $2.19
a year earlier. Growth came from opening a new prison in
Georgia, and new or expanded contracts with government
agencies in Puerto Rico, Idaho, Colorado and Oklahoma.
Corrections Corp. has providedguidance for a 16% rise in
2013FFO per share to between $2.72 and $2.87. Some of this
growthwill likely come from a one-timetax benefit of between
$115 million and $135 million from converting to a REIT.
Corrections Corp. plans to pay quarterly dividends at an
annualized per-share rate of $2.04 to $2.16 this year. At the
mid-point of this range, sharesyield almost 2%. In addition,
the company will pay a special one-time dividend of at least
$650 million to investors during 2013. Thespecial dividend
will be a combination ofcash andstock .
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|
2.
Geo Group |
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Geo Group (
GEO
)
is the second-largest prison operator, Geo Group, also
recently converted to a REIT. Geo's operations include 101
correctional, detention and community re-entry facilities;
and 73,000 owned or managed beds.
Geo's FFO has grown on average 17% in each of the past
five years, and the company estimates 2012 FFO per share is
expected to be at least 8% higher than last year at between
$3.44 and $3.60. However, management has said that 2013 FFO
per share will be roughly 5% lower because of the sale of the
company's health carefacility operations, which was required
for the REIT conversion.
Geo paid a special one-time dividend of $5.68 per share to
investors last December that consisted of an 80/20 mix of
stock and cash. The company is slated to pay its first
quarterly dividend as a REIT in March at an annualized rate
of $2 per share yielding a healthy 5.9%.
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|
3.
American Tower |
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American Tower (NYSE:
AMT
)
is the leading provider of wireless tower services. Since
becoming a REIT in November 2011, American Tower has seen its
share price rise 32%. The company operates more than 50,000
communication towers in the United States and is also
expanding internationally.
American Tower delivered 17% FFO per share growth to $2.28
during the first nine months of 2012 andanalysts predict at
least 15% growth this year. Like other cell tower operators,
American Tower is benefiting from growth in the number of
wireless subscribers and carriers building out their
networks.
American Tower pays dividends quarterly at an annualized
rate of 96 cents a share. Thecurrent yield is somewhat meager
at 1.3%, but this REIT's rapid growth should enable healthy
hikes in the dividend.
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4.
SBA Communications |
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American Tower's smaller rival,
SBA Communications (Nasdaq: SBAC)
, is setting the stage for a REIT conversion and is already
reporting REIT-style FFO alongside its usual operating
results. SBA owns and operates more than 16,500 towers across
the Americas and recently launched operations in Brazil by
acquiring 800 towers in that market.
SBA grew its FFO 49% during the third quarter of 2012 to
$93.1 million from one year earlier. Management projects
full-year 2012 FFO of $371.4 million and FFO rising 23% in
2013 to $456 million.
As a rule of thumb, tower companies wait until accumulated
net operating losses (NOLs) that allow them to shield their
income from taxes expire before converting to REITs. SBA has
about $1.8 billion of NOLs to work through, so it could be a
few years before this company completes the change to REIT
status. At present, SBA doesn't pay a dividend.
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Risks to Consider:
The two prison REITs lease their facilities to federal, state
and local agencies, including the Federal Bureau of Prisons, and
are thus reliant on government funding to pay their bills. State
and local agencies can be notoriously slow payers and in the past
Corrections Corp has received IOUs instead of cash from the state
of California.
Action to Take -->
My top pick overall is American Tower because of the REIT's healthy
growth, which fuels strong prospects for a rising dividend. I also
like Geo Group for its consistent FFO growth and generous yield.
SBA Communications is a pure play on a REIT conversion. Purchasing
shares now could position investors for capital gains and a sizable
one-time special dividend down the road.