REIT Risk Factors Revealed

Real estate investment trust executives cited access to capital, competition for fully priced assets, possible tax reform and likely interest rate hikes as significant risks this year, reported BDO USA, Chicago.

The accounting and consulting firm surveyed the 100 largest REITs about risk factors. REITs unanimously cited access to capital, financing and liquidity as a risk to their business, up from 96 percent in 2016 and 93 percent in 2014. REITs are also bracing for “multiple” interest rate increases, which they worry could lead to restricted access to equity and more expensive debt in the long term, BDO said.

“After enjoying several years of growth following the economic crisis, investors are beginning to take a more cautious approach,” said Stuart Eisenberg, Partner and National Leader of BDO’s Real Estate and Construction practice. “A potential slowdown in the market, combined with concerns of rising interest rates, a lack of continued access to capital and disruptions in several REIT sectors has added to the uncertainty.”

Eisenberg said REITs navigating the current economic environment face a “real possibility this confluence of factors may result in slower growth.”

REITs registered a 3.4 percent annual growth in early June, well behind the broader S&P 500’s 9.9 percent gains.

Additional findings from the BDO RiskFactor Report for REITs include:

Political risk. As they adjust to the Trump administration, REITs are preparing for legislative, regulatory and tax changes including tax and healthcare reform. More than 40 percent of REITs listed concerns related to the new administration in their annual 10-K filings with the Securities and Exchange Commission and 26 percent mentioned Pres. Trump by name. “Among those 26 REITs, Trump’s name is mentioned 59 times,” BDO said.

More than 70 percent of REITs mentioned financial reporting risks and accounting rule changes as risk factors, up from 69 percent in 2016 and 50 percent in 2014. The recently finalized Lease Accounting Standard ASC 842–which will require REITs to account for operating leases on their balance sheets rather than on income statements–will take effect in December 2018.

“REITs may think the lease accounting and revenue recognition standards won’t significantly impact them, but they may be surprised,” said BDO USA National Assurance Partner Angela Newell. “Applying the new standards can be complicated, and organizations that aren’t making headway on an adoption plan–establishing it and putting resources behind it–risk falling behind.”

Cybersecurity represents another REIT risk. REITs’ reliance on information systems and technology has grown significantly an recent years and nearly three-quarters cited operational risks associated with implementing and maintaining technology and systems, up from 43 percent in 2014. More than 90 percent of REITs surveyed identified cybersecurity as a threat in their disclosures, up from just 25 percent in 2012.