Non-traditional Commercial Real Estate
Capitalizing on the REIT opportunity
Over the past few years, an alternate Real estate investment trust (REIT) segment has emerged, comprised of owners of income-producing real estate such as timber, data centers, document storage facilities, cell towers, prisons, and billboards.
This paper discusses this new segment leveraging the REIT structure and the key strategic and tactical priorities for REIT conversion.
Real estate investment trust (REIT) has traditionally been adopted by owners of commercial properties, such as retail, office, industrial, multifamily, hotels and healthcare, due to its inherent benefits.
These benefits include a single-level of taxation, easier access to low-cost capital, and higher valuation attributed by capital markets. In addition, investors consider REITs an alternate asset class from a portfolio diversification perspective, given that their returns have a moderate correlation with the S&P 500.
Over the past few years, an alternate REIT segment has emerged, comprised of owners of income-producing real estate such as timber, data centers, document storage facilities, cell towers, prisons, and billboards.
These companies have opted to convert to a REIT to capitalize on the benefits of the structure, and are classified as “non-traditional” as the underlying assets have different and unique characteristics compared to the owners of traditional properties. In fact, the returns of the non-traditional REITs have low to moderate correlation with the S&P 500 and the traditional REITs, which provides diversification option to investors within the real estate sector.
Non-traditional REITs have performed better financially from a relative point of view to to the traditional ones during the past five-year (2007-2011), 10-year (2002-2011) and 20-year period (1992-2011), likely due to the distinctive features of the varied non-traditional REIT subsectors. For instance, data center REITs have posted strong topline growth as they are in a high-growth phase, propelled by the increase in adoption of cloud computing and demand for analytics and data storage.
Timber REITs have demonstrated better return on equity (ROE) due to timber sales from qualified REIT properties, and production and manufacturing businesses under their taxable REIT subsidiaries (TRS), which have driven the asset turnover higher. From a valuation perspective too, average price/funds from operations (FFO) of non-traditional REITs exceeded the traditional ones in all three periods.