Inherent market risks are not stopping real estate owners from choosing to operate as niche real estate investment trusts. A move some analysts see as an emerging new trend.
According to Fitch Ratings, eight companies have converted or spun-off assets into a REIT since 2010.
Despite “inherent risks not present with core property types,” wrote George Hoglund, Fitch Ratings associate director, REITs, the number of real estate landlords turned their companies into nontraditional REITs for tax purposes is increasing.
“Tax savings at the corporate level and higher earnings multiples for REITs than C-corps,” he argues.
There are, however, some downsides along with the benefits. The inherent risks in these specialized companies “would likely result in lower credit ratings than
More specifically Hoglund wrote, risks include the limited established secured lending/CMBS market for the asset class, the depth of transaction market, and potential alternate uses or nontraditional lease structures.
There also is an expectation so see lower long-term performance among niche assets that can result in “lower leverage for a similar rating level when compared with more traditional REITs.”
Recent examples include the 2013 conversion of Corrections Corp. of America, an owner and operator of privatized correctional and detention facilities.
Depending on their property sectors, the analyst warns, niche REITs “often have differentiated risks that may be less familiar to investors” that concentrate in the more traditional: office, industrial, multifamily, retail and health care REITs.
