Iron Mountain Incorporated (IRM), Rayonier Inc. (RYN): IRS Rethinking REIT Conversions Is Good News

Everyone in the water

Wall Street does most things in grand style. That’s what leads to the excesses that result in bubbles and the unfortunate aftermath when a bubble inevitably bursts. The wave of REIT conversions that has been gaining steam has the potential to quickly reach such excess. That, in turn, could forever tarnish a valuable income producing asset class.

The wave started with paper companies. Potlach, Rayonier Inc. (NYSE:RYN), and Weyerhaeuser Company (NYSE:WY) all converted to lumber REITs at around the same time. The transition made logical sense, since the companies generate revenue from their land holdings. That said, there are important differences to note between owning an apartment and owning timberland.

Rayonier Inc. (NYSE:RYN), for example, has an important business in the cellulose area of the paper market and plans to keep pressing growth in the niche. Cellulose, however, is an end product that has little to do with owning timberland. You only get cellulose from processing timber. Sure, it’s a great business that held up well while the housing market was weak, but it is a far cry from the occupancy, rent concession, and improvement cost issues that traditional REITs deal with.

Avoiding taxes

The benefit of shifting from a paper company to a timber REIT was in the avoidance of corporate level taxes. That’s good for shareholders and the company, but should raise eyebrows at the IRS. Since such conversions seemed to be getting an easy pass, Wall Street started to go into overdrive with REIT conversions.