Date: January 28, 2013
Source: News Room
Shares of Waste Management, Inc. (Houston, TX) recently rose on speculation that the company might convert to a real estate investment trust (REIT). REITs, which allow investors to own property simply by purchasing a stock, are designed to generate positive cash flow and can avoid most corporate taxes. To become a REIT, a company must obtain at least 75% of its revenue from rents and direct real estate activity, and it must pay out at least 90% of its net income to shareholders. The idea that Waste Management might convert to a REIT was suggested by Credit Suisse analysts led by Hamzah Mazari in an investment report which asserted that discussions with tax lawyers and accountants confirmed that landfills with their air rights qualify for REIT status. Waste Management shares later retreated when company spokesperson Lynn Brown denied any plans to do a REIT conversion.
According to Mazari, "By nature a landfill's assets are not only just real estate but also air rights as one can go vertical in building out a landfill structure post capping and closure. Also nobody wants their garbage back which means it can be in the landfill in perpetuity much like a perpetual real estate lease agreement. Therefore we believe tip rates at the landfill and transfer station revenue qualify as REIT income."
Mazari went on to suggest Waste Management and Republic Services as the two companies best suited for conversion. "Given operating flexibility [of Waste Management and Republic] is less of a concern than growth oriented names like Waste Connections and Progressive Waste Solutions. Our full report shows the ROIC for WM and RSG can be significantly higher (about 250-300bps) under REIT conversion."