iREIT Daily

You Gotta Know “FFO”

Brad Thomas

467 postsMarch 1, 2021

Quote for Today:

“An organization’s ability to learn, and translate that learning into action rapidly, is the ultimate competitive advantage.”
Jack Welch

Source

I’m celebrating this week, and I want you to join in the joy.

You see, I’ve officially gotten all the last parts and pieces of The Intelligent REIT Investor submitted to Wiley, my publisher. Unless something crazy happens, the book should be out and ready to be read on or before my birthday, May 10^th.

Its official debut date will be here before we know it. Yet I just can’t wait to share at least some of what I wrote.

That’s why I’m going to be covering different REIT topics today, tomorrow, and the rest of this first week of March. I know I throw around industry jargon all the time as if it was second nature.

And, to me, it is.

The same is true for many, many of my readers. But if you’ve been struggling to figure out exactly what I’m talking in certain segments of certain articles, you’re hardly alone.

Take funds from operations, which I map out in Chapter 10: Growth and Value Creation…

“Investors in common stock generally use net income as a key measure of profitability, with the term clearly defined under GAAP [generally accepted accounting principles]…
“Yet these net income figures are less meaningful for REITs… [since] in accounting, real estate depreciation is always treated as an expense. But in the real world, not only have most competitive properties retained their value over the years, but many have appreciated substantially. This is generally due to a combination of rising land prices due to inflation and increasing construction costs, steadily rising rental and operating income, and property upgrades. That’s why REITs tend to report FFO as well, which adds real estate depreciation under GAAP back into net income…
“Historically, FFO was defined in different ways by different REITs, which caused investor confusion. To address this problem, Nareit stepped in. In 1999, it refined its definition of FFO to mean ‘net income computed in accordance with GAAP, excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures should be calculated to reflect funds from operations on the same basis.’
“Even so, there are a number of problems with FFO. For one thing, commercial properties can, in fact, slowly decline in value year after year, due to wear and obsolescence. Owners have to invest in occasional improvements and structural replacements if a property’s value is to be retained (e.g., new roofs or better lighting). Merely adding back depreciation to net income then when determining FFO can provide a distorted and overly rosy picture of operating results and cash flows. It fails to account for these major but recurring capital expenditures.
“Also, items that investors should consider part of ordinary property maintenance (e.g., an apartment building’s carpeting, curtains, and dishwashers) are usually capitalized and depreciated rather than expensed for accounting purposes. But since FFO ignores those depreciation expenses, it’s artificially inflated, giving a misleading picture of a REIT’s real cash flow. Practically speaking, carpeting and related items really do depreciate over time, and the costs to replace them are real and recurring.
“Additionally, commissions paid to leasing agents when renting offices or other properties are usually capitalized, then amortized and written off over the term of the lease. Paying leasing commissions can perhaps stabilize or improve occupancy, yet it doesn’t add anything to the property’s value. It’s a real expense that, when ignored in calculating FFO, will overstate profits and cash flows. The same can be said about tenant improvement allowances, such as those provided to office and retail tenants. These are out-of-pocket costs that are often so specific to particular tenants’ needs that they don’t increase the property’s long-term value.
“Finally, not all REITs capitalize and expense similar items in similar ways when reporting their FFO. Some ignore noncash investment write-offs, for example, while others do not. Some even include certain property sale gains. Simply put, there’s a lack of consistency here.”

Fortunately, that’s where adjusted funds from operations (AFFO) comes in. Which is something we’ll cover tomorrow.

Monday Morning REIT News

Powered by The Daily REITBeat

Today XHR announced 4Q earnings and commented that they had its entire Same-Property portfolio (34 properties) open and operating during the entire fourth quarter noting that these properties achieved RevPAR of $50.82, as a result of occupancy of 27.8% and an ADR of $182.64 plus mentioned that they sold four hotels for a total sales price of approximately $391 million and as of March 1, 2021, the Company has approximately $710 million of liquidity, including cash and cash equivalents and availability under its revolving credit facility, reflecting a $40 million reduction in liquidity as compared to year-end 2020 driven by the timing of debt service and property insurance payments plus mentioned that same-property RevPAR for January was $41.83, as a result of occupancy of 24.5% and an ADR of $170.41 and estimates that same-property RevPAR for February was approximately $61, as a result of occupancy of approximately 33% and an ADR of approximately $183 .

On Friday, TRNO announced that it had acquired an industrial property located in Kirkland, Washington on February 25, 2021 for a purchase price of approximately $33.8 million which consists of one industrial distribution building containing approximately 127,000 square feet on 7.2 acres that provides 20 dock-high and seven grade-level loading positions and parking for 252 cars and noted that the property is 100% leased to five tenants, all of which expire by December 2026 with an estimated stabilized cap rate of the property is 2.9%.

Source: The Daily REITBeat

Happy Investing

Brad Thomas

467 posts

View all my Posts

Brad Thomas is Senior Research Analyst at iREIT and CEO of Wide Moat Research LLC. With over 30 years of real estate experience, he is also long-time Editor of Forbes Real Estate Investor, a monthly subscription-based newsletter that dives deep into the vast world of profitable properties, and since 2021, he has served as an adjunct professor at New York University.

Thomas has also been featured on or in Forbes magazine, Kiplinger's, U.S. News and World Report, Money, NPR, Institutional Investor, GlobeStreet, CNN, Newsmax, and Fox. And he was the #1 contributing analyst on Seeking Alpha in 2014, 2015, 2016, 2017, 2018, 2019, 2020 and 2021 based on both page views and number of followers.

Thomas is the recently-published author of The Intelligent REIT Investor Guide (2021), co-author of The Intelligent REIT Investor (2016), and he wrote The Trump Factor: Unlocking The Secrets Behind The Trump Empire (2016) - all available on Amazon.

Thomas received a bachelor of science in business/economics from Presbyterian College and is married with five wonderful kids.

REIT Mutual Fund	Symbol
Alpine Realty Income and Growth Fund	AIGYX, AIAGX
American Century Real Estate Fund	REAIX, REACX, AREEX, AREWX, ARYCX, AREDX
Real Estate Securities Fund	MRESX
AR Capital Real Estate Income Fund	ARIAX, ARICX, ARIPX
AssetMark Real Estate Securities Fund	AFREX
Aston/Harrison Street Real Estate Fund	AARIX, ARFCX
Baron Real Estate Fund	BREIX, BREFX
BlackRock Real Estate Securities	BIREX, BAREX, BCREX
Brookfield U.S. Listed Real Estate Fund	BRUAX, BRUCX, BRUIX, BRUYX
CGM Realty Fund	CGMRX
West Loop Realty Fund	REIIX, REIAX, REICX
Cohen & Steers Institutional Realty Shares	CSRIX
Cohen & Steers Realty Income Fund	CSEIX, CSDIX, CSBIX, CSCIX
Cohen & Steers Realty Shares	CSRSX
Columbia Real Estate Equity Fund	CREAX, CREIX, CRRVX, CRERX, CREEX, CRRFX, CREWX, CRECX, CREBX
Compass EMP REC Enhanced Volatility Weighted Fund	CWRAX, CWRIX, CWRTX, CWRCX
Davis Real Estate Fund	RPFRX, DREYX, DRECX, DREBX
Delaware Real Estate Investment Trust Portfolio II	DPRTX, DPRBX
Delaware Real Estate Investment Trust Portfolio	DPREX, DPRSX, DPRRX, DPRCX
DFA Real Estate Securities Portfolio	DFREX
Dunham Real Estate Stock Fund	DAREX, DNREX, DCREX
DWS RREEF Real Estate Securities Fund	RRRRX, RRREX, RRRAX, RRRSX, RRRBX, RRRCX
DWS RREEF Real Estate Securities Income Fund	REFAX, REFCX, REFIX, REFSX
Eaton Vance Real Estate Fund	EAREX, EIREX
EII Realty Securities Fund	EIIRX
Fidelity Advisor Real Estate Fund	FHEIX, FHEAX, FHETX, FHECX, FHEBX
Fidelity Advisor Real Estate Income Fund	FRIRX, FRIQX, FRINX, FRIOX
Fidelity Real Estate Income Fund	FRIFX
Fidelity Real Estate Investment Portfolio	FRESX
Fidelity Spartan Real Estate Index Fund	FSRNX, FRXIX, FSRVX
Fidelity Series Real Estate Equity Fund	FREDX, FREFX
Fidelity Series Real Estate Income Fund	FSREX, FSRWX
Forward Real Estate Long/Short Fund	KSRYX, FRLSX, FFSRX, KSRAX, KSRCX, KSRBX
Forward Real Estate Fund	FPREX, FFREX, KREAX, KRECX
Forward Select Income Fund	KIFYX, FSIMX, FFSLX, KIFAX, KIFBX, KIFCX
Franklin Real Estate Securities Fund	FREEX, FRLAX, FRRSX, FSERX
GMO Real Estate Fund	GMORX
Goldman Sachs Real Estate Securities Fund	GREIX, GRETX, GREAX, GRESX, GRERX, GREBX, GRECX
Great-West Real Estate Fund	MXREX
Heitman REIT Fund	OARTX, OBRTX
ING Real Estate Fund	CRARX, IREWX, IDROX, CLARX, CRWRX, CRCRX, CRBCX
INVESCO Real Estate Fund	REINX, IARFX, IARIX, IARYX, IARAX, IARRX, IARCX, AARBX
Ivy Real Estate Securities Fund	IRSAX, IREIX, IRSYX, IRSRX, IREEX, IRSCX, IRSBX
John Hancock Real Estate Securities Fund	JIREX
Johnson Realty Fund	JRLTX
J.P.Morgan Realty Income Fund	URTLX, JRIRX, URTAX, URTBX, URTCX
J.P. Morgan Security Capital U.S. Core Real Estate Securities Fund	CEEAX, CEERX, CEEFX, CEESX, CEECX
J.P. Morgan U.S. Real Estate Fund	SUSIX
Lazard U.S. Realty Equity Portfolio	LREIX, LREOX
Lazard U.S. Realty Income Portfolio	LRIIX, LRIOX
Manning & Napier Real Estate Series	MNRIX, MNREX
Morgan Stanley Institutional U.S. Real Estate Portfolio	MSUSX, MUSDX, MSULX, MURSX
Natixis AEW Real Estate Fund	NRFAX, NRFYX, NRFBX, NRFCX, NRFNX
Neuberger Berman Real Estate Fund	NBRIX, NBRFX, NREAX, NRERX, NRECX, NRREX
Nuveen Real Estate Securities Fund	FREAX, FARCX, FRSSX, FREBX, FRLCX, FREGX
Oppenheimer Real Estate Fund	OREAX, OREIX, OREYX, ORENX, OREBX, ORECX
PHOCAS Real Estate Fund	PHREX
PIMCO RealEstateRealReturn Strategy Fund	PRRSX, PETPX, PETAX, PETDX, PETCX, PETBX
Pioneer Real Estate Shares	PWREX, PYREX, PCREX, PBREX
Principal Real Estate Securities Fund	PIREX, PIRPX, PREPX, PRETX, PREJX, PRRAX, PRERX, PRENX, PRAEX, PRCEX, PRLEX
ProFunds Real Estate UltraSector ProFund	REPIX
Prudential Select Real Estate Fund	SREAX
Prudential U.S. Real Estate Fund	PJEAX, PJEZX, PJECX, PJEBX
REMS Real Estate Income 50/50 Portfolio	RREIX
REMS Real Estate Value-Opportunity Fund	HLRRX, HLPPX
Rydex Real Estate Fund	RYREX, RYHRX, RYCRX
SA Real Estate Securities Fund	SAREX
SEI Institutional Mgd Real Estate Fund	SETAX, SEIRX
Spirit of America Real Estate Income & Growth Fund	SOAAX
SSgA Clarion Real Estate Fund	SSREX
Stratton Real Estate Fund	STMDX
T.Rowe Price Real Estate Fund	TRREX, PAREX
TIAA-CREF Real Estate Securities Fund	TIREX, TRRPX, TRRSX, TCREX
Vanguard REIT Index Fund	VGSNX, VGRSX, VGSLX, VGSIX
Virtus Real Estate Securities Fund	PHRAX, PHRIX, PHRCX, PHRBX

REIT ETF	Symbol
Flex Shares	ASET
Wisdom Tree Global Ex-US	DRW
S&P 500 Equal Weight	EWRE
iShares FTSE Industrial/Office	FNIO
MSCI Real Estate Index	FREL
S&P REIT Index	FRI
First Trust S&P REIT	FRI
iShares Real Estate 50	FTY
Flexshares Global	GQRE
iShares Cohen & Streers	ICF
iShares International Developed RE	IFGL
iShares US RE	IYR
Premium Yield Equity REIT	KBWY
ETRACS Monthly Pay 2x Leverage	MORL
Market Vector Mortgage	MORT
iShares Global REIT	REET
iShares FTSE Mortgage	REM
iShares Residential	REZ
IQ US Real Estate Small Cap	ROOF
iShares FTSE NAREIT Retail	RTL
DOW Jones Global RE	RWO
SPDR Dow Jones	RWR
Schwab US REIT	SCHH
Super Dividend REIT	SRET
ProShares Ultra RE	URE
Vanguard REIT	VNQ
Vanguard Global ex-US	VNQI
iShares International Developed	WPS
Wilshire US REIT	WREI
Pacer Benchmark Data & Infrastructure RE	SRVR
Pacer Benchmark Industrial RE	INDS
Pacer Benchmark Retail RE	RTL
Hoya Capital Housing	HOMZ
NetLease Corporate RE	NETL

REIT Name	Ticker	Annual Increases/yr
Federal Realty	FRT	51
Universal Health Realty	UHT	33
National Retail Properties	NNN	29
Realty Income	O	27
Tanger Outlets	SKT	26
Urstadt Biddle	UBA	25
Essex Property Trust	ESS	25
W.P.Carey	WPC	22
National Health Investors	NHI	17
Equity Lifestyle	ELS	15
Digital Realty	DLR	15

You Gotta Know “FFO”

Brad Thomas

467 postsMarch 1, 2021

Featured Articles

The Great Housing Market Migration Is VERY Interesting

Let Dividends Help You Deal With Disappointment In The Stock Market

Amazon Wants to Ask What Ails You

Wall Street’s Workforce Crisis Should Be Taken Seriously

Santa Claus Has Left the Building

You Gotta Know “FFO”

467 postsMarch 1, 2021

REIT Mutual Funds

REIT ETFs

Not All Dividends Are the Same