Oft-ignored Rouse will turn into REIT It may finally catch Wall Street's eye while avoiding some taxes

Name won't be changing

There even may be a little something in it for the shareholders

Commercial real estate

November 21, 1997|By Kevin L. McQuaid | Kevin L. McQuaid,SUN STAFF

Rouse Co. yesterday announced plans to convert to a real estate investment trust beginning in January, one of the more dramatic shifts in its 58-year history and a move that should significantly increase the Columbia-based real estate firm's Wall Street exposure.

As a REIT, Rouse will rank as one of the nation's largest, with a $5 billion total market capitalization and a portfolio containing 250 retail malls, festival marketplaces, community developments, office buildings, warehouse properties and hotels in 26 states and Canada.

By comparison, when giant mall owners Simon Property Group Inc. and DeBartolo Realty Corp. merged in March 1996 to become the nation's largest trust, they had a combined market capitalization of $7.5 billion and controlled 183 retail projects.

"This will broaden our longer-term opportunities and our investor base at the same time," said Anthony W. Deering, Rouse's chairman and chief executive.

In converting, Rouse becomes one of the last major U.S. real estate firms to switch to REIT status, illustrating the acceptance and stature that the trust industry has achieved in the past five years.

Between 1992 and the end of October, for instance, the amount of REIT stock held by the public has increased from $13 billion to $131 billion, according to the REIT industry's Washington-based trade group.

Moreover, since the REIT boom began in the early 1990s in response to a nationwide commercial real estate collapse and cash-strapped developers' need for Wall Street capital, about 200 once privately held real estate entities have converted to REIT status.

"The industry has definitely gained acceptance over the past few years, and I think Rouse is seeing the need to open themselves up to an investor class that is dedicated to REITs only and perhaps didn't understand why they weren't a REIT," said Jeff Langbaum, a REIT industry analyst at BT Alex. Brown Inc.

Despite the change in corporate structure, Rouse will maintain the same name and properties, and its stock will continue to be traded in the same way. Rouse received permission to convert from the Internal Revenue Service late last month.

But Rouse's shift will result in numerous, if less visible, changes for the company, started by James W. Rouse in 1939 as a mortgage firm.

Perhaps most importantly, the change to a REIT will allow Rouse to avoid paying out as much as $100 million a year in taxes by 2000, when its earnings outpace the amount of depreciation allowed from its properties. With depreciation and other noncash charges, Rouse pays only about $1.5 million a year in taxes.

Under federal law, REITs are exempt from paying income taxes, in exchange for distributing 95 percent of their earnings to shareholders through dividends.

For Rouse shareholders, the conversion likely could result in slightly more money in their pockets, although Deering said the change should have little impact on the company's dividend policy. He added, however, that he expects Rouse's board to increase the $1-per-share annual dividend in 1998 based on the company's performance.

Rouse's stock price may rise as well, thanks to increased activity and Wall Street attention. Some 30 recently established mutual funds, for instance, invest only in REITs, and Deering and analysts believe that the REIT conversion will open the company up to a whole new investor.

The need to increase exposure may not be necessary, but Deering and others hope that it will be profitable. Over the last three years, for instance, despite consecutive record earnings, Rouse's stock has remained glued in the mid-$20s per share. As the market closed yesterday -- prior to the REIT conversion announcement -- Rouse's shares rose just 6 cents to close at $28.19. The conversion also will make it easier for Rouse to acquire other publicly traded real estate firms, at a time when the REIT industry has begun consolidating though mergers and VTC acquisitions. Federal law also prohibits non-REIT companies from acquiring REITs.

As a REIT, Rouse also is likely to receive much more attention from Wall Street, since most real estate analysts cover REITs exclusively.

"We were being left out," Deering said. "Here we are, one of the largest real estate companies in the country, and Wall Street analysts left us out of research reports and industry analysis."

At least part of Rouse's motivation for converting to a REIT, sources said, also can be found in federal tax legislation that failed to gain necessary support in the House and Senate this year.

A provision of the 1997 Tax Act would have required companies converting to REITs to pay out hundreds of millions of dollars in taxes upon converting, and Rouse executives feared that the provision might surface again in a later tax bill.

Pub Date: 11/21/97

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