What is a REIT report?
Publicly traded REITs, as well as many non-listed ones, must file quarterly and annual reports, Forms 10-Q and 10-K, respectively, with the Securities and Exchange Commission (SEC). These regulatory filings contain three key pieces of financial data for the reporting period:
- A balance sheet.
- An income statement.
- A cash flow statement.
Many also contain lots of other information. These reports can include commentary about the real estate company and what occurred during the quarter, market data, and supplemental financial information to provide investors with an even more detailed picture of what happened during the period. That extra information tends to be quite useful because it typically provides a better look at a REIT’s underlying financial results than its GAAP numbers do.
Many REITs will also issue a slimmed-down version of their quarterly and annual reports, usually via a press release. This document is usually much easier to digest as it typically contains:
- Commentary on the reporting period, often highlighting important financial metrics.
- The REIT’s balance sheet at the end of the period.
- An income statement.
- A reconciliation of the income statement -- which conforms to Generally Accepted Accounting Principles (GAAP) -- to its funds from operations (FFO), which is a common non-GAAP metric used by REITs.
That last metric is vital to REIT investors, and it holds the key to our discussion here.
The one metric REIT investors need to know
For most companies, net income -- which is the last number on an income statement -- is the most important metric because it tells the owners how much the business earned during the reporting period. But net income isn’t the best way to measure a REIT’s financial performance, mainly because of the impact of depreciation, which can be significant. This noncash expense reduces a REIT’s taxable net income. While the lower net income helps cut a REIT’s tax burden, it masks its real earnings power.
FFO, on the other, adjusts for noncash items like depreciation to provide investors with a more accurate picture of a REIT’s cash flow during the period. It also adjusts for other one-time items, like gains and losses on the sale of properties, which can have a noticeable impact on net income. In addition to reporting FFO as defined by NAREIT, some REITs also provide adjusted and normalized FFO numbers in their report to give investors an even more accurate reflection of their cash flow during the period, which determines their ability to pay dividends.
To help investors see the difference between net income and FFO, let’s look at a real-life example from healthcare REIT Medical Properties Trust (NYSE: MPW). Here’s a snapshot of its consolidated income statement in the third quarter of 2019, which compares that period with the prior year: