BDO United States

Chicago – June 05, 2012 - The real estate industry is still feeling the effects of a slow economic recovery. According to a report issued by BDO USA, LLP, a leading accounting and consulting organization, the challenging economic climate ranks as the top risk for REITs this year, cited by 100 percent of REITs analyzed. Property valuation also remains a key concern with nearly two-thirds of REITs identifying risks associated with stagnating or declining business and real estate values and asset impairment. Amid economic uncertainty, the financial condition of tenants is a risk for 71 percent of REITs.

The 2012 BDO RiskFactor Report for REITs, which analyzes the most recent SEC 10-K filings for the 100 largest publicly traded REITs in the U.S., also finds that 72 percent of REITs identify development and construction risks. Development risks are particularly in focus for both multifamily REITs, which are ripe for growth and new projects, and retail REITs that are struggling to respond to the shift to online shopping. Failure by a REIT to realize their development and redevelopment plans may compromise profitability, and, more broadly, their overall business strategy.

"The real estate industry's dependence on strong national and global economic conditions makes it vulnerable to high unemployment rates, reduced consumer spending and a lack of business growth. Obtaining the appropriate mix of debt and equity financing coupled with difficulties in determining the value of the properties are major risks to investors," said Stuart Eisenberg, partner and national director of the Real Estate practice at BDO USA, LLP. "In such a fragile real estate market, much of a REITs’ success depends on having an attractive property with financially stable tenants in a prime location."

The following chart highlights the top 25 risk factors cited by the 100 largest U.S. REITs:

Additional findings from the 2012 BDO RiskFactor Report for REITs include:

• Consumer preferences drive increased competition, impacting mergers, acquisitions and business strategy. As REITs battle it out for the most attractive properties and lease terms, 93 percent of REITs note concern over the intense competition for prime real estate and tenants. On the acquisition side, competition extends beyond other REITs. A vast majority (90 percent) of REITs cite acquisition risks as other REITs, private equity funds and foreign investors all look to funnel money into real estate and acquire principal property assets in hot areas.
  

• Financing still a concern; debt leveraging poses operational risks. The Federal Reserve reports little change in banks’ standards on CRE loans. As banks continue to practice prudent lending habits, nearly all REITs (97 percent) cite access to capital and financing as a top concern. The majority of REITs (90 percent) indicate that indebtedness, which may lead to overleveraging, is a foremost threat to cash flow, while 79 percent foresee risks from restrictive debt and financial covenants tied to lines of credit and property debt.
  

• Attractive low interest rates today may impact dividends, cash flow and refinancing when increased. REITs continue to be an attractive investment as interest rates trend near zero. According to Federal Reserve Chairman Ben Bernanke, the central bank has plans to continue to hold interest rates low until 2014 in order to spur spending. The vast majority of REITs (92 percent) fear that when interest rates go up cash flow and distributions will be severely impacted.
  

• Unfavorable taxation makes qualifying as a REIT a top priority. REITs benefit from exemption from meeting certain U.S. federal and income tax requirements. If a REITs’ status is terminated, it will be taxed as a corporation, slashing shareholder distribution payments. As a result, it’s not surprising that all of the top 100 REITs find the failure to qualify for REIT status a principal risk. Even though REITs are primarily concerned with tax risks related to maintaining REIT status, 79 percent also cite general tax issues, including increases in real property taxes, as a top concern.
  

Material discussed is meant to provide general information and should not be acted on without professional advice tailored to your firm’s individual needs.

About the Real Estate Practice of BDO USA, LLP.

With extensive industry knowledge, the partners and directors in BDO’s Real Estate practice are value-driven advisors who offer accounting and tax experience in both the national and international commercial real estate arena. The practice services a wide range of clients including middle-market REOCs, developers and real estate investment trusts, providing quality and timely guidance on major financial matters.

About BDO

BDO is the brand name for BDO USA, LLP, a U.S. professional services firm providing assurance, tax, financial advisory and consulting services to a wide range of publicly traded and privately held companies. For 100 years, BDO has provided quality service through the active involvement of experienced and committed professionals. The firm services clients through more than 40 offices and more than 400 independent alliance firm locations nationwide. As an independent Member Firm of BDO International Limited, BDO serves multinational clients through a global network of 1,082 offices in 119 countries.

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