By Drew FitzGerald
News that the Internal Revenue Service was reviewing what
constitutes a U.S. real estate investment trust left a diverse
collection of companies less sure about their future tax
treatment--and less valuable in the stock market Friday.
Shares of network facility operator Equinix Inc. (EQIX),
billboard owner Lamar Advertising Co. (LAMR) and car-auction lot
owner Copart Inc. (CPRT) all fell--on an otherwise up day for the
market--after document manager Iron Mountain Inc. (IRM) revealed
that a new IRS working group was reviewing legal standards for
REITs.
The news raised the possibility that the IRS may make it tougher
for those companies seeking to change their tax status to a REIT,
which allows companies to largely avoid corporate taxes if they pay
most of their taxable income to investors through dividends.
An IRS spokesman had no immediate comment on the agency's new
working group.
Iron Mountain is one of several nontraditional property owners
that have asked the IRS for REIT treatment. The Boston storage
company has argued its document-racking structures qualify as real
estate and intends to convert to a REIT next year. Iron Mountain
shares recently fell 17% to $28.67.
Analysts cautioned, however, that the risk to each company's
REIT status varies widely depending on the kind of assets they
own.
"Private letter rulings are binding agreements between the IRS
and the requesting party, and as a result do not create
precedence," Jefferies analyst Omotayo Okusanya wrote. "That said,
we would be surprised if companies looking to become REITs with
previously approved 'REIT-able' asset classes did not" win IRS
nods.
Establised asset classes bode well for network facility operator
Equinix, which sought REIT status in September after similar
data-center landlords such as Digital Realty Trust Inc. (DLR)
secured the same status.
Equinix acknowledged that the IRS working group could affect it,
but said it "continues to believe, based on both existing legal
precedent and the fact that other data center companies currently
operate as REITs, that its data center assets constitute real
estate for REIT purposes."
Shares of Equinix fell 5.5% to $192.72.
As for Lamar Advertising, Mr. Okusanya said the IRS already eyes
outdoor advertisers on a case-by-case basis.
For its part, Lamar remained confident. "Based on its
discussions with the IRS, the company has no reason to conclude
that it will not be in a position to complete the previously
announced plan," Lamar said in a filing with the U.S. Securities
and Exchange Commission. The outdoor advertiser intends to make its
conversion effective next year.
Nonetheless, shares of Lamar still slumped, sliding 4.1% to
$43.66.
The process also creates uncertainty for the outdoor advertising
business of CBS Corp. (CBS), which the media company took steps to
divest. CBS said earlier this year that it could convert to a REIT
in 2014.
CBS shares fell 1.1% to $48.30.
Without so much as a similar precedent, companies with more
"unusual" assets could face a bigger challenge, Mr. Okusanya said,
noting a lack of precedent for companies like Copart as well as
Waste Management Inc. (WM) and Republic Services Inc. (RSG), which
own landfills.
Copart shares declined 6.3% to $32.25.
Delays caused by the IRS review could also set back companies'
performance even if they eventually receive the agency's approval.
Analysts noted the wait wouldn't affect Equinix as seriously as
companies with earlier deadlines, though--it aims to complete the
process by 2015, providing plenty of time to deal with working
group questions.
"At this point, we see little risk on this front given the
company's target date for conversion," Stifel Nicolaus analyst Todd
Weller wrote in a note to clients, adding its case is helped by the
fact that similar data-center operators have already won the tax
treatment Equinix is seeking.
--John Jannarone contributed to this article.
Write to Drew FitzGerald at andrew.fitzgerald@dowjones.com
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