One of the issues we had been watching in 2013 was the potential for the FASB to require retailers to capitalize operating leases. During our recent dinner with FNP, management noted that ‘not only will it not happen in 2013, but don’t hold your breath in 2014, and maybe not 2015 either’.
In the end, this issue really does not matter as it relates to cash flow as it is purely an accounting change. But the reality is that retailers have always given the false appearance of being high return businesses, as their largest asset (real estate) has been considered to be free from a balance sheet perspective.
But capitalizing leases would take up leverage ratios for retailers. Ratings agencies already look at EBITDAR, so it is unlikely that this would impact their ability to borrow. But traditional valuation characteristics would certainly change unfavorably for investors.
Unless FNP is wrong, it looks like we won’t have to worry about this for a while.