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With Stocks Trading At Massive Discount, Should REITs Restructure?

Vornado CEO Steven Roth at REITWeek 2014

REITs around the country struggling with low share prices and their constant need for transactions may be forced to look at radical options to change the narrative.

Some REITs could consider changing form into C corporations, Bloomberg reports. The primary advantage of a REIT is that it pays no corporate taxes, but in exchange it must invest at least 75% of its assets into real estate, receive 75% of its gross income from property and pay out at least 90% of its earnings as dividends.

C corporations have no such requirements on expenditure and revenue, but do have to pay taxes. Under the previous law, which taxed corporations 35%, such a conversion would be nearly unthinkable, but the new Republican tax policy lowered that rate to 21% and added to the number of possible deductions companies could take. That changes the equation enough to be more enticing to certain REITs that are struggling with the changing retail environment or stuck with outdated office assets.

Large retail holders like Sears spinoff Seritage Growth Properties or Macerich are among the most likely candidates to convert into C corporations, Third Avenue Real Estate Value Fund Portfolio Managers Jason Wolf and Ryan Dobratz said in a letter to investors, as reported by Bloomberg.

Wolf and Dobratz also mentioned Vornado and JBG Smith, which is the result of a merger between JBG Cos. and Vornado's Washington, D.C., branch, as REITs that would stand to benefit from transformation. REITs have used mergers and asset sell-offs as a way to appease concerned investors as their stocks continue to struggle. 

Shares in REITs are trading at a 16% discount relative to the value of their assets, the Wall Street Journal reports — an unheard-of disparity outside of a recession. The gap has caused consternation at REITs like Forest City Realty Trust, which saw most of its board resign over shareholder anger. For now, it seems that investors prefer private real estate funds due to their greater stability in the face of rising interest rates, according to the WSJ. Such behavior might add to the impetus for REITs to restructure for similar reasons.