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Strategies & Market Trends : Value Investing

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From: Grommit	1/11/2019 1:39:39 PM
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Reit lease accounting. DLR attributed most of their reduced earnings outlook to lease accounting changes. CXP discussed this in conf call awhile back -- and this is a good summary (see clip). DLR surprised the analysts with their reduction; CXP says no effect on them -- accounting less aggressive. The point here -- IMO, this accounting change will affect DLR earnings for more than one year, but should not affect dividend or dividend increases, unless they focus on div payout ratios. ############ Michael, two good questions... we really have not been capitalizing any significant internal leasing cost. So that's not going to be a burden on us in terms of reduction to FFO next year. Really for us, what this means and we will still be able to capitalize brokerage commissions, all we will have to do is not capitalize legal fees. And that's not a very big number for us. So this change in the rules is really not going to have much effect on us as we go into 2019 that we think. I can't speak for other companies but it will have more of an effect on others. Okay, now to the question you actually did ask. This may be having an effect because as you know users of office or users of any real estate space are going to have to put the lease obligation on their balance sheet as a liability and then they will have a corresponding asset on the balance sheet that's kind of messy. I don't know that it's really affecting their debt covenants. But it's just a little bit messier. So I guess it might be the case that some users are looking at shorter term leases rather than having a big liability on their balance sheet. But we really haven't seen it. I would say, we haven't really seen any reduction, any desire by any tenants to reduce lease term as a result of that. So it's just not showing up for us at least yet. FASB link: LINK In other words, current off-balance sheet leasing activities will be required to be reflected on balance sheets so that investors and other users of financial statements can more readily and accurately understand the rights and obligations associated with these transactions.

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