CHICAGO—Is the Trump administration the leading risk factor for REITs? Maybe not, yet a sizable percentage—44%—of the 100 largest public REITs cite concerns related to the new administration in their latest 10-K filings, according to BDO LLP. Twenty-six of the top 100 mention Trump by name in their filings, a total of 59 times.
Although the new administration per se didn't top REITs' concerns as measured by the 2017 BDO RiskFactor Report for REITs, the uncertainty around the timing and content of federal policy changes figures prominently in the conversation. In their 10-Ks, some REITs cited specific shifts in legislative and regulatory priorities that could have a material effect on their business, including travel restrictions, tax reform and the ongoing efforts to repeal and replace the Affordable Care Act.
“Beyond these high-profile initiatives, regulatory, tax and accounting changes that could impact REITs' operations are already underway—and REITs are taking note in their disclosures to shareholders,” according to BDO. The firm's report further notes that “competition for assets at lucrative prices, the anticipation of tax reform and the likely drumbeat of interest rate hikes through the rest of 2017 could be peppering the market with uncertainty and serving up unappetizing borrowing cost increases for REITs.”
Topping the list of risk factors are two macroeconomic concerns: general economic conditions, including disruptions in the financial markets; and access to capital, financing and liquidity. The latter moved up in the rankings from 2016, with citations by all 100 of the top publicly traded REITs, compared to 96% of them in last year's RiskFactor report and 93% in 2014. In particular, REITs are bracing for the impact of multiple interest rate increases, which may lead to restricted access to equity and more expensive debt in the long term.
Another factor moving up in the rankings is risks related to tax laws and potential increase in rates, cited by 97% of the top REITs in their 10-Ks, compared to 85% three years ago. Among the changes proposed by the Trump administration and/or contained in the Republican's tax reform blueprint, the elimination of the corporate alternative minimum tax, alterations to carried interest treatment and the elimination of the 1031 exchange are among the key factors that are top of mind for real estate trusts.
“Of key concern are the provisions that could alter rules related to REITs' tax status and have a material impact on their taxable income,” according to BDO. “With tenants spanning diverse industries, REITs' fiscal health can also be sensitive to tax changes affecting tenants' operations.” Accordingly, REITs are closely watching how these proposals develop as they move from the drawing board into reality.
“After enjoying several years of growth following the economic crisis, investors are beginning to take a more cautious approach,” says 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. For REITs navigating the current economic environment, there is a real possibility this confluence of factors may result in slower growth.” BDO's annual study ranks the risk factors according to the frequency of their citation in REITs' 10-Ks.
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Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
