What’s So Special About Specialty REITs?

With the recent proliferation in specialty real estate investment trusts (REITs) in the U.S., Standard & Poor’s Ratings Services continues to consider how to appropriately evaluate REITs as the definition of “real estate” expands beyond the boundaries of our REIT criteria, which specifically focus on companies that own and operate real estate in the traditional property sectors (see “Key Credit Factors: Global Criteria For Rating Real Estate Companies,” June 21, 2011).

We are likely to evaluate many of the nontraditional specialty REITs in the U.S. that have recently converted to REITs or are under consideration for REIT formation as operating businesses that are now adopting the REIT structure for financing purposes. In these cases, we would not rate the newly formed REIT applying Standard & Poor’s real estate company criteria. Instead, the analytical team with the most appropriate industry sector expertise would assess the entity, and Standard & Poor’s general corporate industrials rating criteria (as noted in the Related Criteria And Research section of this report) would apply.

We generally don’t expect rating revisions to result from companies’ change in tax election to a “REIT wrapper.” There are many factors, however, that we take into account during the rating process, which we explain in our answers to the frequently asked questions below.

We will continue to monitor ongoing developments, particularly in regard to investor and lender receptivity to these newly converted specialty REITs. We will also watch for whether the expanding use of the REIT structure attracts the focus of fiscally minded policymakers, considering that any meaningful change to the industry’s tax or structural benefits could affect our overall credit perspective.

What is a specialty REIT?

Specialty or niche REITs are companies that invest in real estate other than the traditional sectors: office, retail, apartment, and industrial. These major subsectors are also commonly referred to as “core” property types. Specialty REITs include companies that own mortgage investments, health care facilities, data centers, self-storage properties, life sciences buildings, movie theaters, cellphone towers, timber stands, prisons, gas stations, solar farms, golf courses, or railroads, for example.

Standard & Poor’s currently publicly rates many specialty REITs. In some cases, we rate the entity by applying our criteria for rating real estate companies and, in other cases, by applying our criteria for the specific industry sector in which the entity operates.

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