Investors create unique $2.1bn REIT vehicle

An IRS ruling opened the way for five investors to create first-of-a-kind real estate investment trusts to invest in US electric and gas distribution and transmission networks.

Five institutional and corporate investors have agreed to invest $2.1 billion in electric transmission and gas distribution real estate investment trusts, the first such trusts to be used for investing in US infrastructure. 

Hunt Power, Marubeni Corporation, John Hancock Life Insurance (USA), Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF), and OPTrust Private Markets Group announced last week they have agreed to form Electric Infrastructure Alliance of America (EIAA) and Gas Infrastructure Alliance of America (GIAA). 

Hunt Power subsidiaries will invest up to $322.5 million. John Hancock Life Insurance and TIAA-CREF will each invest up to $450 million. OPTrust Private Markets Group, the private markets investment arm of Canadian pension fund OPTrust, will invest up to $400 million. Marubeni Corporation, a Tokyo-based trading house, will invest up to $500 million.

The two REITs will be focused on acquiring transmission and distribution networks in the southwestern US, Texas and the Great Plains and will be managed by subsidiaries of Hunt Power. Kirk Baker, chairman and president of the alliances and senior vice president of Hunt Power, said they will not initially consider investments outside of that geographic area. 

A REIT defined
US Congress passed a law creating REITs in 1960 with the aim of making it easier for people to pool money and own real estate. REITs invest in real estate and make money for investors from the rents they collect, according to the US Securities and Exchange Commission.  

REITs pay less taxes than corporations and are often thought of as a way of avoiding the double-dip of having to pay corporate tax and dividend tax. In return, 90 percent of a REIT’s taxable income must be paid to shareholders every year. In addition, they are required to have 75 percent of their revenue come from real estate income and gains and also are required to invest 75 percent of their total assets in real estate.

The IRS opened the way for Hunt subsidiary Sharyland Utilities to create a REIT when it ruled in 2007 that the company could consider income from transmission networks to be real estate income. In theory, if REITs expand to infrastructure, they could incorporate small investors into a pool previously open only to larger ones. 

“I think that the REIT is a familiar model to people, especially to smaller investors,” said Lou Weller, a principal at Deloitte.  “One of the hopes of a REIT structure is to open investment in infrastructure to a larger group of people.”

But Baker said there are no plans to take either of the two trusts public, which would limit their accessibility to small investors. And it is not clear if the IRS ruling will enable other investors to follow Hunt’s lead. Hunt’s REITs were created because the company requested clarification of the law and the IRS responded favorably. The IRS’ ruling is likely to serve as a guideline in the future, but it does not guarantee that other infrastructure will be considered “real estate” for the purposes of developing such a trust, Weller said. 

A good match
Energy lends itself to REITs in a way that most other infrastructure does not, in large part because of a “decoupling” of energy distributors from energy providers in the US over the past ten years or more, Weller said. This makes for an easier shift to using REITs: money made from distribution can count as real estate income, while the profits of the provider do not.

But for toll roads, ports and other infrastructure projects, as they are currently managed in US, the separation is not easy to create or define. That means that they are unlikely to be configured as REITs. 

“That is one reason why REIT infrastructure is starting with energy distribution, because it lends itself to the split of creating electricity and passive ownership through which those things flow,” Weller said.

“Other infrastructure areas have been a bit more challenging,” he added.