BDO Study Shows Uptick in REIT Conversion

The 2013 BDO RiskFactor Report for REITs, a new survey by BDO USA, finds that a surge in companies filing for REIT status may be leading to an increase in scrutiny over which companies should qualify.

Chicago—The 2013 BDO RiskFactor Report for REITs, a new survey by BDO USA—an accounting and consulting organization based in Bethesda, Md., finds that a surge in companies filing for REIT status may be leading to an increase in scrutiny over which companies should qualify. Findings from the survey predict competition for tenants across the commercial and residential real estate sectors as being something to watch in 2013.

According to Stuart Eisenberg, practice leader of BDO’s real estate practice on the residential side, the multifamily segment has led most of the discussion around market improvement, but as housing buys pick up, rental properties could suffer.

“The commercial space continues to struggle with high competition due to conservative growth and spending practices,” he says.

The report portrayed the risk landscape for REITs as changing, with findings of 100 percent of REITs citing failure to qualify as a REIT as a risk. While failure to qualify is always a top concern for REITs, the recent uptick in conversion activity, along with Congress’ review of the REIT tax exemption, are both avenues of concern regarding possible loss of REIT status.

One key finding of the survey shows that concern over healthcare reform is rising, with 24 percent of REITs naming it as a risk—more than doubling the 10 percent mark of last year.

Also, with all the storms and natural disasters that have popped up the past year, it’s no surprise that the category looking at natural disasters, climate change and insurance saw an uptick as well. A staggering 90 percent of REITs cite natural disasters as a top threat—an increase of seven percent from last year. Additionally, 87 percent cite insurance premiums and being under or uninsured as a major concern.

Privacy and security are always a hot topic, and the number of REITs that consider cyber security a problem rose from 25 percent to 39 percent, as they understand how important protecting data is.

On the positive side, retail real estate is showing signs of improvement according to those surveyed, as only 29 percent of REITs note the loss of a major anchor or tenant as a risk—down from 31 percent last year.

Access to capital remains a problem but did show a slight decrease from 97 percent last year to 94 percent this time around.

Strong competition for lessees and prime real estate remains more of concern this year for REITs than the previous year, jumping in rank from fifth to third. REITs also continue to cite indebtedness as a top risk, with 85 percent of those surveyed weighing in, which may be a sign that many REITs have underlying properties that have unfavorable loan to value ratios.

The survey analyzed the most recent 10-K filings for the 100 largest publicly traded REITs in the United States.