How to Take Advantage of Huge Real Estate Dividend Payoffs


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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.

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 .

2. Geo Group
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%.

3. American Tower
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.

4. SBA Communications
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.

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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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