REIT Column: Top 2016 Resolutions for REITs
- Dec 16, 2015
By Anthony La Malfa, Partner, BDO USA
For many, New Year’s resolutions serve as an annual clean slate, offering an opportunity to overhaul habits and focus on getting healthy once and for all. The all-too-familiar problem, though, is that these resolutions are often abandoned before the winter snow melts. This year, there are a few resolutions REITs can make—and, more important, keep—to start off the new year on the right foot, get their balance sheets healthy and power through 2016:
Reduce reliance on low-rate debt. Many analysts predict that near-zero interest rates could soon be a thing of the past. With a strong chance that the Federal Reserve will raise short-term interest rates by the end of this year, REITs should take advantage of the current low rates and consider accelerated refinancing in order to lock in favorable rates before the cycle ends. As higher-yield investments, REITs can experience more sensitivity to interest rate changes than some other investment classes. REITs should address their reliance on low-rate debt when building 2016 expansion plans since higher interest rates will mean increased costs on financing for new properties and refinancing of existing debt.
Diversify portfolios to reduce risk. As REITs answer market demands for a clearly communicated and focused strategy, some are choosing to diversify to minimize risk and encourage greater risk-adjusted returns over time. And more REITs are diversifying: According to REIT.com, the number of diversified REITs has nearly doubled since 1999. However, even companies that have a diversified mix of assets are smart to choose a regional portfolio focus to maintain a unique value proposition and control exposure to concentrations in markets with less upside potential. A smart diversification strategy, whether by property type or location, is considered essential in maximizing shareholder returns over the long term.
Monetize assets in more mature markets. To stay ahead of the herd, REITs might consider monetizing their assets in gateway markets, many of which are slowing, in pursuit of a portfolio focused on emerging markets with high growth potential, like Austin and Savannah. Strategically selling some assets in larger, more-established markets like New York or Chicago will free capital, allowing REITs to pursue deals in secondary markets that might be at an earlier point in the growth cycle and ultimately might provide a better return.
Enhance transparency and due diligence. Smart REITs will work to strengthen communications with key stakeholders around performance and business risks to ensure nothing is overlooked in the development and implementation of the new year’s business strategy. The 2015 BDO RiskFactor Report for REITs reveals insights about the ever-evolving REIT landscape, in which REITs are not only subject to risks around industry-specific concerns like taxes and compliance but also the fluctuations of broader market fundamentals. High standards of due diligence and increased transparency around risks and outcomes will help REITs continue to thrive in 2016 and beyond.