The amount of non-traditional real estate landlords converting to real estate investment trust tax status increased significantly over the past several years.
The REITs growing popularity occurred despite inherent risks not present with core property types. To put it into perspective, since 2010 eight companies have converted assets into a REIT, according to Fitch Ratings.
The primary benefits of electing REIT status include tax savings at the corporate level and earning higher profits compared to being a c-corporation — where income is taxed at the corporate level and then taxed again when it’s distributed to owners.
On the other hand, niche REITs often have different risks that may come less familiar to investors that concentrate in the traditional property sectors — multifamily, retail and single-family.
For instance, there are inherent risks in these specialized companies that could result in lower credit ratings than a comparable REIT in a core property type with similar credit metrics.
Risks involved with niche REITs include the limited established secured lending/commercial mortgage-backed securities market for the asset class, the depth of transaction market and potential alternate uses or non-traditional lease structures, analysts for Fitch explained.
Additionally, long-term performance data on niche assets is often lacking.
“The end result is likely lower leverage for a similar rating level when compared with more traditional REITs and a focus on the unsecured debt markets as a funding strategy,” said George Hoglund, associate director of REITs for Fitch.
The list of candidates for REIT conversion or REIT initial public offerings is expanding to include owners of billboards, landfills, casinos and document storage facilities.
A recent example of niche REIT conversion is American Tower Corporation (AMT) — an owner, operator and developer of wireless and broadcast communications real estate, the credit rating agency noted.