The real estate sector uses several supplemental measures (e.g., funds from operations (FFO), Adjusted FFO (AFFO), normalized FFO, and net operating income (NOI)) to evaluate a company's performance because traditional metrics don't always do it justice. One financial measure the sector has developed via industry trade group NAREIT (the National Association of Real Estate Investment Trusts) is EBITDA for real estate, or EBITDAre. This supplemental measurement provides investors with a more accurate picture of a real estate investment trust's (REIT) underlying earnings performance in a quarter or full year. That provides a better metric to use when comparing various REITs during the same period.
What is EBITDAre, and how does it differ from EBITDA?
NAREIT developed EBITDAre to help investors evaluate REIT performance while considering the unique capital structure of each company. The metric provides a uniform way to compare earnings for various REITs. That allows investors to perform other calculations, such as analyzing the leverage ratios of multiple REITs.
EBITDA, which is earnings before interest, taxes, depreciation, and amortization, is a non-GAAP metric that investors use to adjust for the impact of a company's capital structure on its underlying earnings. EBITDAre takes that metric a step further by specifically adjusting for items specific to real estate companies like gains and losses on the sale of real estate assets and the impact of writing down the value of a property or an investment in an unconsolidated joint venture.
Thus, it helps investors gain a more accurate picture of what a REIT earned while conducting its normal operations. By normalizing for this impact, REIT stockholders can see how a REIT's performance more accurately compares to its peers.
How is EBITDAre calculated?
NAREIT calculates EBITDAre as:
- GAAP Net Income.
- Plus (+) interest expense.
- Plus (+) income tax expense.
- Plus (+) depreciation and amortization.
- Plus or minus (+ or -) losses and gains on the sale of a depreciated property, including losses or gains on change of control of assets.
- Plus (+) impairment write-downs of depreciated property and investments in a noncontrolling interest (like an unconsolidated joint venture) caused by a decrease in the value of a depreciated property at the affiliate.
Why EBITDAre is important for REIT investors
Like EBITDA, EBITDAre is a useful metric for investors for things like:
- An overall screening tool.
- To measure the enterprise value of a REIT.
- To indicate how much cash flow an entity is generating via its operations.
- As a supplemental way to measure performance.
- To measure a company's debt service and fixed cost coverage.
One of the most common ways REITs use EBITDAre is when measuring their leverage ratios, especially when compared to their subsector peers. For example, many REITs will include slides in their latest investor relations presentations that use EBITDAre as the primary metric to measure leverage. Some REITs will have graphics showing the improvement in their net debt-to-EBITDAre over the prior year or quarter and comparing their debt-to-EBITDAre to their closest rivals. Thus, the metric allows for an apples-to-apples comparison between periods and peers.
EBITDAre is a useful metric for a REIT investor's toolbox
EBITDAre helps REITs more accurately measure their underlying earnings so that investors can better gauge their performance. That allows them to compare REITs more efficiently, which is especially helpful in analyzing leverage. Thus, it enables investors to more accurately analyze REITs to find ones that might be undervalued or less risky compared to their peers.