Real Estate Investment Trusts

Assurance Expert Outlines Impact of FASB Definition of Business Standard on REITs

Jennifer Hillenmeyer, a partner in national assurance at EY, joined REIT.com for a video interview at REITWise 2017: NAREIT’s Law, Accounting & Finance Conference in La Quinta, California.

Prior to her current position at EY, Hillenmeyer completed a two-year fellowship at the Financial Accounting Standards Board (FASB). While there, she worked on two standards of particular significance to REITs.

Hillenmeyer discussed the two standards, which cover the definition of a business and the derecognition of non-financial assets, in depth. She noted they will have a “significant impact” on REITs.

Regarding the definition of a business standard, it creates a threshold stating that if substantially all of the value of an acquisition is concentrated in a single asset or group of similar assets, then the transaction is not considered to be a business.

“When applying the threshold, FASB was really thinking a lot about real estate transactions,” Hillenmeyer said. She noted that exceptions exist whereby the purchase of a single building can be combined with the land and an in-place lease to create a single asset, and it won’t be considered a business. Today, if there is an in-place lease, almost all real estate transactions are considered a business, she explained.

(Why?)

Published at Wed, 26 Apr 2017 17:13:18 +0000

Technology Playing Growing Role in Accounting Activities, Duke Realty Executive Says

Mark Patterson, vice president of tax at Duke Realty Corp. (NYSE: DRE), joined REIT.com for a video interview at REITWise 2017: NAREIT’s Law, Accounting & Finance Conference in La Quinta, California.

Patterson commented on some of the challenges faced by REIT tax directors. He stressed that directors need to focus on REIT compliance rules, getting the tax returns out and staying abreast of new tax developments.

Patterson noted that technology is playing a crucial role in accounting activities as the work load continues to expand.

Meanwhile, in order to maximize compliance with REIT tax rules, Patterson underscored the need for a REIT tax director to stay in touch with the company’s CFO and CAO in order to ensure that all parties are in sync.

(Why?)

Published at Wed, 26 Apr 2017 17:18:23 +0000

Partnership Planning Expert Highlights Changes in Audit Rules

Terence Cuff of Loeb & Loeb LLP joined REIT.com for a video interview at REITWise 2017: NAREIT’s Law, Accounting & Finance Conference in La Quinta, California.

Cuff stressed that partnership rules are constantly changing.

Cuff noted that new partnership audit rules have “absolutely changed the audit landscape.” He added that rules have also been promulgated in the past year dealing with liability in the context of sharing liability and disguised sale rules. There have also been changes in the fractions rule, he noted.

With regard to audit rules, Cuff said he anticipates a need to amend essentially all existing partnership and limited liability company agreements.

(Why?)

Published at Wed, 26 Apr 2017 12:53:29 +0000

Deloitte Principal Offers Primer on PATH Act Changes

Mark Van Deusen, principal at Deloitte LLP, joined REIT.com for a video interview at REITWise 2017: NAREIT’s Law, Accounting & Finance Conference in La Quinta, California.

Van Deusen commented on tax changes resulting from the Protecting Americans From Tax Hikes (PATH) Act of 2015, which includes reforms to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA).

According to Van Deusen, the preferential dividend rule was “one of the best things” to come out of the PATH act.  The rule denies the dividends paid deduction to publicly traded REITs if their dividends are preferential, or all shareholders are not treated the same

“That’s an easy rule to articulate. It’s a hard rule to comply with in the real world,” Van Deusen observed.

Van Deusen also discussed the impact of the PATH Act on REIT spinoffs. He described the impact for C-corps that spin off REITs in a tax-deferred transaction as “huge.”

Meanwhile, Van Deusen added that the FIRPTA changes “may end up being the most important changes in the PATH Act.”

Under the PATH Act, non-U.S. investors are able to hold up to 10 percent of a publicly traded U.S. REIT’s stock without triggering the FIRPTA tax upon sale of the stock or upon receiving proceeds from a REIT’s sale of assets.

(Why?)

Published at Tue, 25 Apr 2017 17:51:07 +0000

Viewpoint: Data Center REITs and the Quest for Connectivity

The data center REIT sector is at a watershed moment where big strategic bets are being made in terms of how best to invest resources in order to maximize real estate rental income streams tied to future connectivity.

For data center REITs, balancing the push for both scale in an individual market and expansion into new markets is tricky. Data center REITs have found that a large presence is necessary within each market to offer value to large tenants. At the same time, the more markets REITs can play in, the more rents they can collect. There is opportunity to outperform in terms of connectivity for REITs that build up capacity in domestic markets like Dallas, Silicon Valley, Northern Virginia, Chicago and New York, but other priority markets should also include London, Amsterdam, Dublin and Australia.

Getting this strategy right is made more complex by the pressure to redevelop and refurbish older assets.

The technological shifts and efficiencies often require new hardware that is part of structural components to buildings or changes to existing hardware, which requires significant investment for data center REITs in order to stay current. Plus, demand is set to outstrip supply, and that can create pressure to build hastily with short-term considerations in mind.

Connectivity is Key

Connectivity is paramount to the performance of data centers because it drives additional revenue (on top of more commoditized elements like space and power offered as part of leasing space to tenants) and because it is a powerful tool in customer retention.

Connectivity occurs when data centers connect two tenants wishing to share their data with one another or provide content to one another (much like sharing visitors of popular stores within a shopping mall). Consider players like major wireless carriers, device manufacturers or the makers of a popular app – they have data to share and they value data centers that facilitate these transactions securely and efficiently.

More and more REIT data center management teams are playing up the strength of their interconnections.

QTS heavily emphasized the benefits of their connectivity for customers on their third quarter earnings call and highlighted that connectivity revenue is growing annually at more than 15 percent. Digital Realty’s connected campus in Atlanta alone provides more than 11,000 interconnections between 300 customers, and the REIT has now updated its descriptor to “a leading global provider of data center, colocation and interconnection solutions.”

Fundamental Drivers Clear to All

The fundamental drivers for the broader space are clear to all. The number of connected devices is predicted to rise from about 6.4 billion in 2016 to almost 20.8 billion by 2020, according to technology research firm Gartner Inc. IDC, an information technology research company, predicts that the total amount of data produced globally will increase from 10 zettabytes in 2015 to 180 zettabytes in 2025, a 1700 percent increase over 10 years.

This growth is exponential, and while efficiencies mean that the need for new hardware and floor space aren’t directly proportional to the increase in data produced, the demand for more data center capacity and facilities is robust.

Google built the first data center in the United States with a footprint in excess of 1 million square feet back in 2011. According to an Institute of Electrical and Electronics Engineers (IEEE) working group research paper, building 1 million square feet data centers is “now the norm.”

Much of what the data center REIT industry is facing today feels like it could fall into the “nice problems to have” bucket. However, the big strategic bets made by the industry today will have long-term ramifications.

Samuel Sahn is a portfolio manager for global real estate securities at Timbercreek Asset Management, where he heads the New York office.

(Why?)

Published at Mon, 24 Apr 2017 19:26:54 +0000

RLJ Lodging Trust to Buy FelCor for Approximately $1.2 Billion

RLJ Lodging Trust (NYSE: RLJ) said April 24 that it has agreed to buy FelCor Lodging Trust Inc. (NYSE: FCH) in an all-stock transaction that values FelCor at approximately $1.2 billion.

The merger is expected to create the third-largest public lodging REIT. RLJ said the transaction will create a combined company with a pro-forma market capitalization of about $4.2 billion and a total enterprise value of $7 billion. The merged company will have ownership interests in 160 hotels.

Under the terms of the agreement, each share of FelCor common stock will be converted into 0.362 shares of newly issued RLJ common stock. FelCor shares closed on April 21 at $7.37, while RLJ shares closed the same day at $23.80.

Under the terms of the deal, FelCor will become a wholly owned subsidiary of RLJ. RLJ shareholders will own 71 percent of the combined company, with FelCor shareholders owning the remaining 29 percent. The deal is expected to close in the fourth quarter.

During a conference call, Ross Bierkan, RLJ president and CEO, said merging with FelCor was not a recent idea.

“We’ve discussed this often internally over the past five years, with the view that the majority of its portfolio fits very well with our long-term strategy,” Bierkan said. 

Steven Goldman, who became FelCor CEO in February, pointed out that the timing of the deal makes sense strategically.

“The lodging industry is mature, cyclical and we are in a challenging period in the cycle to grow. Scale matters, and it was unclear to me whether FelCor could effectively compete over the long term at its current size and with its current cost of capital,” he said.

Goldman said the combined company will be a “formidable competitor” in the lodging REIT sector.

Competition from Ashford Hospitality

RLJ is not the first REIT to pursue a merger with FelCor. Earlier this year, Ashford Hospitality Trust, Inc. (NYSE: AHT) launched a hostile bid to acquire the company.

Michael Bellisario, analyst at Robert W. Baird & Co., said that while it is possible that Ashford Trust increases its bid for FelCor, “all else equal, we believe FelCor’s board prefers the combination with RLJ.” He pointed out that the pro forma company will have lower leverage than under a merger with Ashford Hospitality and will be internally advised.

Ryan Meliker, an analyst at Canaccord Genuity Inc., said he was surprised by the merger announcement. He noted that RLJ has historically invested in select-service and focused full-service properties, whereas FelCor’s portfolio has gradually moved away from those assets in recent years.

“While the deal appears to be accretive to funds from operation (FFO), increased scale seems to be the driver of the deal more than anything else,” Meliker said.

According to William Crow, an analyst at Raymond James, benefits of the deal include added brand and market diversification. In particular, he said the deal would increase RLJ’s exposure to Hilton’s Embassy Suites chain.

“We like that the transaction gets RLJ shares back on investors’ radar screens (and) is a good start towards much needed industry consolidation,” Crow said.

(Why?)

Published at Mon, 24 Apr 2017 17:35:22 +0000

State Tax Expert Says REITs Should Monitor Local Impact of Tax Reform

Scott Smith, national practice team leader for state and local tax at BDO, joined REIT.com for a video interview at REITWise 2017: NAREIT’s Law, Accounting & Finance Conference in La Quinta, California.

Smith urged REITs to continue to monitor the potential impact on state taxes resulting from comprehensive tax reform and try to plan accordingly. He also noted that states are taking a wait-and-see approach to federal legislation effective in 2018 that will change procedures for how the Internal Revenue Service conducts partnership audits.

In addition, Smith commented on market-based sourcing, which relates to how states will source gross receipts received for the performance of services. Market-based sourcing rules are significant for an Equity REIT’s taxable subsidiary, Smith said. He noted that market sourcing attempts to source receipts to where a customer is located, as opposed to where the service is performed.

Smith stressed that the rules can vary on a state-by-state basis. REITs can end up in a situation where they are sourcing receipts to more than one state, he said.

Mortgage REITs face similar issues in terms of sourcing rules varying state-by-state, Smith said.

(Why?)

Published at Mon, 24 Apr 2017 16:02:33 +0000

Kilroy Realty Executive Says Education Key to Effective Cybersecurity

Michelle Ngo, senior vice president and treasurer at Kilroy Realty Corp. (NYSE: KRC), joined REIT.com for a video interview at REITWise 2017: NAREIT’s Law, Accounting & Finance Conference in La Quinta, California.

Ngo commented on cybersecurity matters and noted that Kilroy is “seeing the gamut” of issues, including fraudulent internal emails asking employees to wire funds to specific bank accounts.

“Education and awareness is certainly the key to combatting all these schemes and plans,” Ngo said.

Ngo also said Kilroy is evaluating several treasury systems, following a migration to a new accounting system a few years ago. She noted that the new accounting system has helped reduce the use of Excel spreadsheets and manual calculations.

Meanwhile, Ngo said cash flow reporting is a big focus of the treasury workstation platform. The company is keen to house all of its cash flow data within one system, she said.

(Why?)

Published at Mon, 24 Apr 2017 14:06:47 +0000

SEC Proposals Remain Under Discussion, Lawyer Says

Carrie Ratliff, a partner at King & Spalding LLP, joined REIT.com for a video interview at REITWise 2017: NAREIT’s Law, Accounting & Finance Conference in La Quinta, California.

Ratliff participated in a REITWise panel on Securities and Exchange Commission (SEC) legal issues.

Ratliff commented on the SEC’s proposed rule that will require companies to disclose a ratio comparing the CEO’s pay with the median workforce. She noted that the issue has generated considerable anxiety, as it will allow all employees to compare their salaries to the median figure.

Ratliff also discussed the uncertainty surrounding SEC proposals on executive clawbacks, noting that many companies already have clawback policies in place. “At this point, you just wait and see what the final rules look like and then adjust from there,” she said.

Ratliff added that her clients are not feeling the need to adopt the rule that was proposed by the SEC given that there’s so much “still up in the air.”

(Why?)

Published at Fri, 21 Apr 2017 15:29:28 +0000

REITs Adapting to Changes in Retailing

In the latest episode of The REIT Report: NAREIT’s Weekly Podcast, Calvin Schnure, NAREIT’s senior vice president for research and economic analysis, discussed the health of the retail REIT sector.

Schnure stressed that changes in shopping habits as a result of the growth of e-commerce have affected some types of properties more than others. Notably, older shopping centers and malls are most vulnerable to the shifts, especially those in areas with lower job growth in the last decade. On the other hand, many newer developments in higher-income locales with better job growth “are doing well,” according to Schnure. He emphasized that REITs primarily own these newer properties in more upscale markets.

“REITs have always occupied the upper portion of the quality spectrum, so this is a place where they’ve been well positioned from the very beginning,” Schnure said.

In terms of how REITs are adjusting to the changes in the retail environment, Schnure said REITs haven’t had much trouble replacing departed tenants. In fact, they’re looking for more productive tenants to fill the empty spaces. These include tenants that can enhance the “experience” of going to a mall or shopping center, providing services such as new dining options, movie theaters and fitness clubs.

Retail REITs are also continuing to invest in improvements to their properties, according to Schnure. “It’s a lot more enjoyable to walk into a mall or shopping center if it has nice finishings and interesting stores and reasonable traffic flow,” he noted.

Schnure offered evidence that retail REITs’ strategies for addressing the shifts in consumer spending are working. Funds from operations for retail REITs were up more than 6 percent in 2016 over 2015. Retail REITs paid $9.4 billion in dividends in 2016, an increase of nearly 8 percent over 2015. Furthermore, their occupancy rate has held steady near a record high of 96 percent.

(Subscribe to the NAREIT Podcast via iTunes.)

(Why?)

Published at Fri, 21 Apr 2017 17:56:01 +0000