Written by Summary
The most common measure of earnings for REITs is Funds From Operations (“FFO”).
FFO often includes earnings that do not exist except in the unreal world of accountants and has other complications as a measure of earnings.
We search for fake income by comparing FFO with the Adjusted FFO found by REITbase.net, in some cases examining more details.
It turns out that the ratio of price to FFO or to AFFO may not what you need to know to assess the value of the stock.
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Kwarkot/iStock via Getty Images The commonly available measure of earnings for equity REITs is Funds From Operations, or FFO. The kicker is that FFO is far from perfect.
FFO often includes substantial non-cash income, which in my view is accurately labeled as fake income. This is a mandated consequence of GAAP accounting, about which more below.
Sometimes FFO also includes real income that is distinct from income produced by the real-estate business. This is not fake income in a general sense, but how to consider it depends on what you want to know. To find out what is what, one must dig into the details.
In contrast to FFO, which has at least some connection to reality, GAAP EPS for REITs is pure fantasy as a measure of anything. Just save yourself the trouble of continuing to read any article that starts talking about that.
Here today we will review all the (more than 90) REITs covered by the analysis service REITbase.net. These are mostly the investment-grade REITs.
We will survey numbers for Q3 2021, because some REITs were still recovering from their revenue decreases during the pandemic earlier in the year. Then we will look more closely at four REITs with surprisingly high levels of apparent fake income in Q3: Prologis ( PLD ), Alexandria Real Estate ( ARE ), Medical Properties Trust ( MPW ), and W.P. Carey ( WPC ).
Disclaimer: this article dives into some messy stuff that sometimes matters. If you are looking for a light read, it is not for you. Some Comments on FFO
The idea behind FFO was discussed in the relevant white papers from NAREIT. It was to define an earnings measure that captured earnings from real estate operations better than GAAP EPS does.
Ideally what you might want to know as “earnings” is the cash income less all the costs of doing business. But the world is not so simple.
The world is complex in part because many REITs have some earnings that are not from real estate operations. An investor probably wants to know about both types. Neither FFO nor AFFO, discussed below, necessarily provides this.
Worse than that is the challenge that in various ways GAAP accounting generates fake income.
The Securities and Exchange Commission, or SEC, resists alternatives to GAAP EPS and apparently the process of revising standardized adjustments is difficult. There was one white paper in the late 1990s and a second in 2018.
In addition, if you look at the NAREIT FFO charts, there was a sharp and partly fake drop during the Great Recession. It was a consequence of non-cash impairments. At the time those were included in evaluating FFO. That changed in 2012, with this clarification by NAREIT .FFO is nearly always evaluated, directly from GAAP SEC filings, by a process that is almost entirely specified. It starts with GAAP Net Income and makes specific adjustments. The result is the “NAREIT FFO”.In almost all cases, numbers for FFO provide the NAREIT FFO, but somehow not always. I use TIKR.com a lot to pull SEC filings and analyst estimates, but I have seen them get FFO wrong.I’ve seen results from other automated data gatherers be wrong too, in that and other ways. Use them with caution.Here are a couple other examples. Last I checked YCharts uses their own, non-standard definition of FFO, which I find infuriating. And if I am reading a footnote correctly, the REIT UMH Properties ( UMH ) makes one adjustment in reporting their FFO that I find inconsistent with the NAREIT definition.The primary adjustments today to GAAP Net Income that are part of evaluating FFO are to add back in depreciation and any impairments. These are both non-cash items.As we will see below, there are a variety of other non-cash items that can remain buried in the NAREIT FFO. And there are also […]
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