Talking REIT Conversions And Spin-Offs

| About: Forest City (FCE.A)
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By Tatiana Swedek

REIT spin-offs and conversions were a popular and controversial topic at the end of 2015. Why didn't we write any blog posts on such a hot topic? Between frantically running from store-to-store in search of last minute holiday gifts, scheduling blog posts for the (multiple) long weekends in December and decompressing with perhaps a drop too much of pinot noir, it's safe to say our heads were elsewhere. Well, we once again have an opportunity to talk REIT conversions and spinoffs, thanks to Forest City (NYSE:FCE.A) (NYSE:FCE.B).

This past Monday, Forest City Enterprises announced a big move:

"the completion of the merger of FCE Merger Sub, Inc., an Ohio corporation, with and into Forest City Enterprises, Inc., with Forest City Enterprises, Inc. surviving as a wholly-owned subsidiary of Forest Realty Trust, Inc."

Another merger, so what? Well, this merger turns the Cleveland-based investment and development firm into a REIT, making shareholders of the Forest City Enterprises shareholders of the REIT as well. That means big money. When announcing Forest City's intention to transform into a REIT last year, CFO Robert O'Brien said the transition would offer Forest City a "tax-efficient structure to continue to drive shareholder value," according to The Real Deal. While Forest City will have to distribute 90% of its taxable income to its shareholders, they will also receive a significant tax savings -- one of the many reasons companies want to transform into or spin-off into REITs.

Spin-off Talk

Remember when Hilton Worldwide Holdings Inc. (NYSE:HLT) announced its plan to spin-off 147 hotels into a real estate investment trust (REIT) last month? The company mentioned that the REIT would include properties such as Hilton Chicago, Hilton San Francisco Union Square, and Hilton Hawaii Village Waikiki Beach Resort. After the spin-off, Hilton will still operate its franchise segment, which consists of 4,333 hotels and its timeshare business that is comprised of 45 properties.

During the 2nd and 3rd quarter reports this year, Hilton CEO Christopher Nassetta alluded to the fact that Hilton was trying to create value for shareholders by exploring potential options for the real estate assets. Spin-offs have become the weapon of choice for companies trying to increase stock value. The growing popularity of REITs is largely due to the fact that REITs pay less corporate taxes and trade at higher multiples than their parent companies, according to the Wall Street Journal. When Hilton announced the intended spin-off on December 16th, investors reacted positively to the news, which resulted in a 5.2% increase of Hilton stock on that day.

Many companies conduct spin-offs solely for the tax benefits a REIT structure offers. At the end of 2015, some politicians announced their plans to end what they see as a deceitful practice. Chairman of the House Ways and Means Committee, Kevin Brady (R-TX), introduced a bill in early December that will prevent companies from spinning off their properties into a REIT for tax benefits. Luckily, Hilton requested IRS approval before the December 7th deadline, making them exempt from any future ruling regarding REIT spin-offs.

While Forest City's transformation into a REIT is not the same as Hilton's spin-off move, it is still a change for the enterprise. The 95-year-old company has been a public company for 55 years, after all. While REIT spin-offs will occur less frequently in 2016 as policies change, Forest City Realty Trust will definitely be reaping the benefits as a REIT in the years to come.