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NOI and after recurring CapEX

Analysis of REITs

Department of Real Estate Studies

Real Estate Investment

Dr SeungHan Ro

FFO vs. NI


Revenues, including capital gains

- Operating expenses and write-offs

- Depreciation and amortization

- Interest expense

- General and administrative expense (G&A expense)

= Net Income

+ Real estate depreciation

- Capital gain from real estate sales



Why is FFO better than NI for REITs ?


- The reason is that, in accounting, real estate depreciation is always treated as an expense, but in the real world, not only have most well-maintained quality properties retained their value over the years, but many have appreciated substantially. This is generally due to a combination of increasing land value, steadily rising rental and operating income, property upgrades, and higher costs of construction for new competing properties. Thus a REIT’s net income under GAAP, reflecting a large depreciation expense, has been determined by most REIT investors to be less meaningful a measure of REIT cash flows than FFO, which adds back real estate depreciation to net income.



2. FFO vs. AFFO ( FAD / CAD )



- Recurring capital expenditures

- Amortization of tenant improvements (TI)

- Amortization of leasing commissions

- Adjustment for rent straight-lining



Why is AFFO better than FFO for REITs ?


AFFO (adjusted fund from operation), CAD (cash available for distribution), or FAD (funds available for distribution)

Because the depreciation of real estate and recurring expenses such as carpeting, curtains, or even dishwashers is a real expense, when such “real estate” depreciation is added back to arrive at FFO, the FFO will be artificially inflated and thus give a misleading picture of a REIT’s cash flow. Moreover, commission and TI amortizations, when added to net income as a means of deriving FFO, will similarly inflate that figure. Thus, AFFO, which is the FFO adjusted for expenditures that, though capitalized, do not really enhance the value of a property, and is adjusted further by eliminating straight-lining of rents, is a much better measure of a REIT’s operating performance and is a more effective tool to measure free cash generating and the ability to pay dividends.



NOI and after recurring CapEX


Property or portfolio based Property Revenues

- Property Operating Expenses


- CapEx (Capital Expenditures)

- Finance / Accounting / Organization costs

= NOI after recurring CapEx


The term net operating income (NOI) is normally used to measure the net cash generated by an income-producing property. Thus, NOI can be defined as recurring rental and other income from a property, less all operating expenses attributable to that property. (Operating expenses include real estate taxes, insurance, utility costs, property management, and recurring reserves for replacement but not REIT’s corporate overhead, interest expense, value-enhancing capital expenditures, or depreciation expense.) Therefore, NOI attempts to define how much cash is generated from the ownership and leasing of a commercial property. Investors might expect NOI on a typical commercial real estate asset to grow about 2 – 3 percent annually, roughly in line with inflation, during most economic periods.


Same-store NOI

Same-store rental revenues, reduced by related expenses, determines same-store NOI growth, which presents a good picture of how well the REIT is doing with its existing properties as compared to the similar prior period. That is, nonretail REIT sectors refer “same-store net operating income” to growth that is internal, rather than from new development or acquisition.



Debt Ratio


What determines a strong balance sheet?

First, a modest amount of debt relative either to its total market cap or to the total market value of its assets; Second strong coverage of the interest payments on that debt, and other fixed charges, by operating cash flows; and third, a manageable debt maturity schedule.


4-1. Debt / Market-Cap Ratio

= Total debt / (Common stock equity + Preferred stock equity + Total debt)


Some general guideline regarding a debt/market-cap ratio:

- Anything over a 55 percent debt/total-market-cap ratio makes some REIT investors uncomfortable, particularly in the more volatile sectors, such as hotels, where cash flows are not protected by long-term leases.

- A ratio under 40 percent is almost always conservative and indicates a strong balance sheet, subject to the other tests described in this section.

- If competition is heating up or there is a danger of overbuilding, even a 50 to 55 percent ratio might be risky.




EBITDA means Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA).


EBITDA = Operating Revenue – Operating Expenses + Other Revenue


Essentially, it is a corporate cash flow measure of operations prior to finance costs and income available for debt service or finance costs.


Operating Revenue (Total Revenue):

- Operating Expenses (Total Expense):

= Net Income

+ Others (Add) such as

Interest expense

Depreciation – real estate assets

Depreciation – non-real estate assets

Amortization of financing costs



Date: 2015-12-11; view: 2471

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