NewsBrief (July 28, 2014)

Message from the President

Digital retail and e-commerce may drive headlines, but a new study by global consultant A.T. Kearney shows consumers overwhelmingly embrace the in-store experience. According to A.T. Kearney's research, the business of brick-and-mortar retail is alive and well.

The A.T. Kearney Omnichannel Shopping Preferences Study found that 90 percent of all retail sales in the U.S. happen within an actual store. The study recognizes the growing influence of e-commerce, but also found that rather than replacing brick-and-mortar retail, it is becoming part of a multi-channel shopping experience. In fact, two-thirds of respondents said they visited a physical retail store as part of their online purchases either before or after the transaction. The in-store experience is an integral part of most online purchases and returns, according to the study.

That confirms a fundamental fact about the real estate that REITs own and finance: These properties are essential components of every community. They are the places where people live, work and shop. And they are the assets that help drive the economy and support its growth, bringing the benefits of real estate investment both to the public and to investors far and wide.







Steven A. Wechsler
President and CEO

New Study Highlights Value of Traditional Retail

Brick-and-mortar stores continue to be customers’ preferred shopping channel and are crucial in generating online sales for retailers, according to a new study by global management consulting firm A.T. Kearney.

According to the A.T. Kearney Omnichannel Shopping Preferences Study, 90 percent of all U.S. retail sales in 2013 were transacted in stores, and 95 percent of sales were accounted for by retailers with a brick-and-mortar presence. The results were based on a survey of 2,500 U.S. shoppers that asked respondents about their shopping preferences and behaviors. The survey covered all age segments.

An omnichannel strategy based on leveraging the appeal of the physical store, supported by digital, “is the best formula for capturing the maximum number of sales, building sustainable customer loyalty and creating opportunities to cross-sell,” said Michael Brown, an A.T. Kearney partner and one of the study’s three co-authors.

The study found that most shopping experiences are processes that involve multiple steps, such as researching, purchasing and possibly returning a product. Consumer preferences vary according to the different stages in the shopping process, A.T. Kearney noted, but there is a preference for brick-and-mortar stores at each step.

According to the study, two-thirds of customers purchasing online used a physical store before or after the transaction. The store makes a significant contribution to generating the sale, even though the transaction may eventually be registered online, the A.T. Kearney study noted.

Art Coppola, Macerich (NYSE: MAC) chairman and CEO, said the A.T. Kearney study "completely validates everything that we know from being in the mall business for 40 years and everything that we know from talking to retailers about their strategy." Brick-and-mortar is the "absolute cornerstone" to their omnichannel strategies, he said.

Coppola added that a physical store offers "the most experiential opportunity for retailers to communicate with their consumer, and it's the most profitable venue for them to sell merchandise."

(Contact: Matt Bechard at mbechard@nareit.com)

Real Estate Organizations Oppose Proposed FAA Rule

NAREIT, along with a group of other national real estate organizations, last week submitted a letter to the Federal Aviation Administration opposing the FAA’s Proposal to Consider the Impact of One Engine Inoperative (OEI) Procedures in Obstruction Evaluation Aeronautical Studies. The proposal would change the longstanding rules the FAA uses to determine hazards in navigable air space to incorporate OEI procedures to Part 77. In effect, this would put many existing buildings and development projects located near airports at risk for violating FAA regulations.

The organizations asked the FAA to withdraw its proposal on the basis that it, “is not grounded on any proven concern for the safety of passengers, building occupants, or communities near airports.”

If the FAA does proceed, the organizations urged it to explore the economic impacts this would have on real estate development rights and property values. In addition, the organizations requested a study of the environmental, social and other consequences the changes would have. Lastly, the letter highlighted potential Fifth Amendment takings implications.

(Contact: Kirk Freeman at kfreeman@nareit.com)

NAREIT Investor Outreach in the Buckeye State

NAREIT’s Research & Investor Outreach team’s July itinerary included 10 meetings with investment organizations across the state of Ohio. During this mid-west road show, NAREIT met with a diverse range of institutional investors in Cincinnati, Columbus and Cleveland that collectively control in excess of $400 billion in assets.

The meetings focused on the benefits that stock exchange-listed REITs bring to investment portfolios, and the fact that REITs have both strategic and tactical portfolio applications. Using a combination of internal and sponsored research, practical examples were provided of how stock exchange-listed REITs may be employed within institutional investment portfolios.

In response to growing investor interest, a number of the meetings featured a discussion of the current domestic macroeconomic outlook and its implications for commercial real estate and U.S. REITs as well as the global real estate market.

(Contact: Meredith Despins at mdespins@nareit.com)

Millennials Make Their Move in REIT Magazine

“Millenials on the Move” is the cover story of the July/August issue of REIT magazine, which is now available both in print and online. The article looks at how REITs across multiple sectors are adapting to the needs of a new generation of consumers.

Sustainability continues to be a growing part of many REITs’ corporate strategy. As a result, companies have become smarter and more adept at collecting volumes of sustainability-related data. “Sustainability Data Comes of Age” explores how companies are putting that information to use and what impact possible reporting standard might have.

“Macerich’s Malls Standing Tall” looks at how mall REIT Macerich (NYSE: MAC) has positioned its properties to capitalize on changing consumer trends and implemented plans to maximize digital retailing and social media into its locations.

Ashford Hospitality Trust (NYSE: AHT) and Ashford Hospitality Prime (NYSE: AHP) Chairman and CEO Monty Bennett is the subject of this issue’s “One-on-One” interview. Economist David Rosenberg forecast the last housing crisis, and he lays out what he sees coming next in this issue’s “Capital Markets” column.

(Contact: Matt Bechard at mbechard@nareit.com)

REIT.com Videos: Market Insights

REIT.com continues to provide a steady stream of interviews with analysts and newsmakers in the real estate industry.

Joel Beam, portfolio manager at Forward Management, is a strong proponent for the benefits of publicly traded REIT preferred stock. He says preferreds have provided a very good value proposition for his fund.

CLICK HERE for more of Beam’s interview with REIT.com.

In a CEO Spotlight video interview, Bill Owens, chairman and CEO of Owens Realty Mortgage, Inc. (NYSE: ORM), says the company is in a period of transition as it looks to sell its remaining properties and use that capital toward its core real estate mortgage financing business. He says the increased regulatory environment has hampered banks’ ability to compete and opened greater opportunities for companies like Owens Realty Mortgage that can close loans more efficiently.

CLICK HERE for more of Owens' interview with REIT.com.

In a CEO Spotlight video interview, David Schulte, CEO of CorEnergy Infrastructure Trust (NYSE: COR), discusses his company’s conversion to an infrastructure REIT. Schulte's company owns real estate associated with pipelines, storage tanks and transmission lines, all assets that he says are crucial as the United States explores the use of more on-shore natural resources.

CLICK HERE for more of Schulte's interview with REIT.com.


Visit the REIT.com video section for more exclusive interviews.

(Contact: Matt Bechard at mbechard@nareit.com)

NAREIT Comments on Recent FASB Decisions on Initial Direct Leasing Costs

On July 25, NAREIT submitted a letter to the Financial Accounting Standards Board (FASB) regarding the board’s recent decisions on initial direct leasing costs. At a joint meeting held on May 21, the board tentatively decided that “initial direct costs” should include only incremental costs that an entity would not have incurred if the lease had not been obtained. These costs could include external and certain internal costs, but would not include allocations of internal costs, such as regular salaries of employees engaged in arranging and negotiating leases.

The decision to allow the capitalization of only incremental costs represents a major change from existing U.S. generally accepted accounting principles (GAAP) and, in practice, international financial reporting standards (IFRS). Currently, many companies capitalize all internal direct leasing costs, provided that they are able to clearly identify those costs as directly attributable to obtaining successful lease agreements.

In the letter, NAREIT objected to the board’s conclusion with respect to initial direct leasing costs, and respectfully requested that the board reverse the decision in order to preserve current practice. On numerous occasions, the board has asserted that the intention was not to change current lessor accounting. However, the board’s decision with respect to leasing costs would change the accounting by many lessors of investment property.

NAREIT does not believe that the current lessor accounting model is broken, and fails to see the reason to create inconsistent accounting results between significant direct internal and external leasing costs that do not reflect the underlying economics of obtaining successful lease agreements.

(Contact: Chris Drula at cdrula@nareit.com)

Clarifying Recently Issued Reporting Discontinued Operations Standard

During quarterly reporting for March 31, NAREIT received questions from its member companies that were early adopters of the Financial Accounting Standards Board’s recently issued Reporting Discontinued Operations Standard. There was an apparent inconsistency in the presentation requirements under Rule 3-15 of Regulation S-X and the revised guidance in the standard for gains and losses on sales that do not qualify as discontinued operations.

Based on informal discussions with the SEC staff in the Division of Corporation Finance, NAREIT understands that the SEC staff will not issue comments in this area for companies when it is clear they have complied with either the standard or the S-X Rule 3-15 presentation requirements. For more information, refer to the July 24 SFO Alert.

(Contact: Chris Drula at cdrula@nareit.com)

REITs in the Community

On July 22, Rep. Shelley Moore Capito (R-WV), second from right, a member of the House Financial Services Committee, met with several NAREIT executives during a visit to Chicago. Here she is pictured with, left to right, Marguerite Nader, president and CEO of Equity Lifestyle Properties, Inc. (NYSE: ELS); Debra Cafaro, chairman and CEO of Ventas, Inc. (NYSE: VTR); and NAREIT First Vice Chair David Neithercut, president and CEO of Equity Residential (NYSE: EQR). Capito received an update on the latest developments in the REIT and publicly traded real estate industry, as well as a brief discussion on several key issues currently being considered by Congress, including reauthorization of the Terrorism Risk Insurance Act (TRIA), Foreign Investment in Real Property Tax Act (FIRPTA) reform and tax reform.

(Contact: Jessica Davis at jdavis@nareit.com)

The NAREIT 2014 Compensation Survey is Now Available

The NAREIT 2014 Compensation Survey is now available. New this year, you can choose between receiving a print edition or the new digital version. CLICK HERE to order your copy. Participating companies receive a complimentary copy of the survey, but additional copies can be purchased at substantial discounts.

NAREIT produces the annual survey in conjunction with FPL Associates L.P. This year’s survey is the most comprehensive edition ever compiled, with a record 130 participating companies and 127 positions covered.

The NAREIT 2014 Compensation Survey provides answers to questions such as:

• Is executive management base pay up or down?


• Have executive incentives increased or decreased?


• And where are stock grants headed?

This year's survey also includes valuable information on benefits practices, including details on the types of benefits offered, and at what levels.

(Contact: Megan Peichel at mpeichel@nareit.com)