CBS Hears the Call of the REIT: It’s Not the Taxes, It’s the Yield

CBS turned heads last week when it announced that it would spin off the outdoor advertising segment of business as a REIT.

The announcement last week gave shares of the entertainment company a 10% lift, its biggest rise in 17 months according to Bloomberg, and share prices this week are higher still.

Press coverage of the spin off has made much of the fact that REITs pay no corporate income taxes on income passed on as income to shareholders, as if the spinoff decision was a tax-savvy move.

But in an interview with AdvisorOne, Ron Kuykendall, vice president for communications of the National Association of Real Estate Investment Trusts (NAREIT), says the real story is not taxes but the ongoing search for yield in a low-rate environment.

“There is a global search for yield going on,” Kuykendall says. “Monetary policy is a key driver in this. It’s not a tax issue; it’s a monetary policy issue. The Federal Reserve has made clear it’s going to keep rates quite low for some time. And central banks around the world have said the same thing. Individual investors and sovereign wealth funds alike are looking for yield.”

It is this surfeit of income opportunities that are driving companies that are able to meet this investor demand.

“The economy is growing slowly, so companies are having a hard time delivering growth,” Kukendall says. “So income stocks are highly valued.”

But the NAREIT spokesman says there is no room for chicanery here; rather, companies must meet a test set by the IRS as to whether it is a REIT. “REIT rules require the company to truly be in the real estate business,” he says.

The IRS, which regulates REITs, defines a real estate company as one that as at least 75% of its assets in real estate and at least 75% of its income as coming from rents. Moreover, to avoid corporate tax, a REIT must pay out at least 90% its income to shareholders, though practically speaking, most pay out 100% of income as dividends to shareholders.