Publically-traded REITs have identified the ability to acquire capital or financing as the biggest risks facing the sector following general economic conditions and the ability to qualify as a REIT, according to the inaugural 2012 BDO REITs RiskFactor Report.
In particular, loan-to-value (LTV) is a great concern, according to Stuart Eisenberg, partner and national real estate industry practice leader at BDO USA LLP, which conducted the study. The report examines the risk factors in the most recent 10-K filings of the largest 100 publicly traded U.S. REITs and ranks them by order of frequency cited.
“While the top risks have been similar for the past two to three years, there has been a subtle change in the tone and language as it relates to the capital markets, specifically concerns about LTV and impairments,” Eisenberg notes.
Nearly all REITs (97 percent) cited access to capital and financing as a top risk of doing business. “REITs are looking to refinance existing properties; however, they are facing a roadblock with banks and other lenders as they deem the real estate industry’s loan to value ratio too high. The future value of a piece of property is tricky to predict, and in the recent past, declining business and real estate values have resulted in an increase of asset impairment,” the report states.
In fact, impairment is a risk for nearly two-thirds (65 percent) of the REITs analyzed in the study. “It’s a big question—at what point are you just sitting on a future impairment?,” Eisenberg says, adding that impairments pop up when REITs have evidence that a property is worth less than they thought. The impairment usually becomes evident during property dispositions and refinancing.