Looking for interesting hedge fund case study pitches? Ever since the IRS changed the tax rulings last year there’s been a flurry of REIT (real estate investment trust) conversions. Companies can now quality for a REIT as long as 75% of their assets are in Real Estate. Before the ruling you had to have almost all of your assets in real estate.

This has allowed for a number of REITs to convert the last few years: AMT, HY, SBRA, along with a bunch of potential REIT conversions: SBAC, CXW, EQIX, CBB, IRM, WPC, GET and the list goes on.

REIT conversions have been at the top of the list for hedge funds with AMT, IRM, and EQIX becoming very popular the last several quarters.

There are a number of reasons it makes sense for shareholders to convert to a REIT:

• No Taxes and that flows right into the bottom line
• REIT’s on average trade at 6-8x higher on earnings than the S&P
• Steady Dividend Yield attracts a large amount of investors
• Currently have the benefit of almost 1-3% cost of capital (great for M&A deals)

Last week IRM announced it will pursue a REIT conversion. Stifel put out a great not highlighting all the key points:

• “Cost of REIT conversion estimated at $325M-$425M, and a significant portion may be paid in 2012.”
• “$1.0B-$1.5B in Earnings and Profits (E&P) to be distributed to shareholders, a significant portion to be distributed in 4Q12 before dividend tax rules change. Minimum of 20% will be cash and maximum 80% equity, equity dividends will be taxable.”
• “IRM plans to file with IRS in July 2012 for approval of the REIT conversion, the process takes about a year, and approval is not guaranteed. Company will incur a tax liability of $225M-$275M (included in the $325M-$425M above) even if approval is not granted.”
• “IRM plans to purchase more of its leased real estate over time, estimates purchase opportunity of $2.5B-$3.0B.
• “High likelihood of equity issuances to support real estate purchases; company to reduce leverage over time. Combination of lower debt (more equity) and more owned real estate to be helpful in meeting REIT requirements over time.”
• “Company seems to be pointing toward $385M-$420M of FAD on 2011 pro forma numbers (as if REIT conversion happened by beginning of 2011), though we don’t believe this captures the $45M YOY negative impact from lower paper pricing in 2012 versus 2011.”

 For real life examples check out the Street of Walls Hedge Fund Case Studies.

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Disclosure: I do not have a position in any stocks mentioned in this article, do not have a plan to initiate a position within the next 72 hours.

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