1031 exchange changes?: As part of the effort to fund the proposed $1.8 trillion American Families Plan (a trillion here, a trillion there... eventually we're talking about real money!), the Biden administration is proposing elimination of 1031 or "like-kind" exchanges on property capital gains above $500k. For those investors perhaps new to real estate/REITs, the 1031 exchange allows owners to defer capital gains on asset sales by rolling those gains into newly acquired assets so as to preserve capital inside the company. While we will be doing work in the coming weeks on the probability of this change being included in the plan, a few initial thoughts:
- On a very preliminary basis, we think the probability of this passing is low
- If passed, REITs with larger/chunkier assets of an older vintage, and therefore likely a lower tax basis, would be impacted in an outsized fashion - think gateway office, full-service/luxury hotels, etc.
- Hesitance by management teams to pay special dividends (to push taxes to the shareholder level and away from the corporate level) and de-capitalize companies would lead REITs to sell chunkier assets much less often
- The asset transaction market would take a very significant hit, with fee revenue implications for real estate brokers such as CBRE and JLL
- There would be a trend towards higher leverage in the most impacted asset classes - rather than selling a building and incurring deal fees, transfer taxes and now capital gains, owners would be incentivized to refinance at a higher leverage level in order to pull out equity and still earn their IRRs
- REITs already carrying high leverage could be unable to participate and be placed in a "box" where they are forced to retain older, lower-growth assets and unable to recycle capital to grow externally
- More to come...
REITweek 2021: NAREIT will be holding its annual June NAREIT conference virtually next week over 6/8-6/10. Below we list the company presentations for our covered companies that we will be monitoring on a real-time basis:
June 8:
- Mid-America (MAA): 10:15-10:45am ET
- Prologis (PLD): 11:45am-12:15pm
- Essex (ESS): 2:15-2:45pm
- EastGroup (EGP): 3:00-3:30pm
- Best Idea Long Public Storage (PSA): 3:45-4:15pm
June 9:
- Life Storage (LSI): 9:30-10:00am
- Camden (CPT): 11:45am-12:15pm
- Best Idea Long American Homes 4 Rent (AMH): 2:30-3:00pm
- Invitation Homes (INVH): 3:15-3:45pm
June 10:
- Best Idea Short Extra Space (EXR): 10:30-11:00am
Please call or e-mail with any questions.
Rob Simone, CFA
Managing Director
@HedgeyeREITs
