A New Metric for Evaluating Performance of REITs.

Joseph CHENG, Alfred LAM

Research output: Journal PublicationsPolicy or Profession paper

Abstract

It has been suggested that conventionalearnings are a poor metric for evaluating the Real Estate Sector which comprises mainly Real Estate Investment Trusts (REITs) because conventional accounting practice “implicitly assumes that the value of real estate assets diminishes predictably over time.” Thus, Funds From Operations (FFO) recently has been proposed as an alternative metric for evaluating REIT performance. This article sets forth a proposition that REITs with debts might be better evaluated by the Unlevered EPS (earnings per share), which is derived by purging out the portion of earnings contributed by financial leverage. Furthermore, relative performance of REITs might be better evaluated by Unlevered Funds From Operations per Share (FPSU), whose portion attributed to debt is also purged out. These unlevered earnings metrics, which are Unlevered EPS (EPSU), and Unlevered Funds From Operations per Share (FPSU), may provide a clearer focus on earnings that are purely performance related. This article describes an interesting comparative study for these metrics which shows that the relative performance of REITs bears a stronger correlation with
standardized percentage change in unlevered earnings metrics than with the standardized percentage change in standard accounting earnings metrics, thereby highlighting the merit of disclosing the Unlevered EPS and Unlevered
FPS to stakeholders as an additional information for a more precise evaluation of performance of REITs.
Original languageEnglish
Pages (from-to)125-132
Number of pages8
JournalReal Estate Finance
Volume36
Issue number3
Publication statusPublished - Jan 2020

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Real estate investment trusts
Earnings per share
Relative performance
Real estate
Debt
Accounting practices
Stakeholders
Evaluation
Financial leverage
Assets
Accounting earnings
Comparative study

Keywords

  • REAL estate investment trusts
  • FINANCIAL leverage
  • INTEREST rates
  • ACCOUNTING standards
  • LONG-term debt

Cite this

CHENG, J., & LAM, A. (2020). A New Metric for Evaluating Performance of REITs. Real Estate Finance, 36(3), 125-132.
CHENG, Joseph ; LAM, Alfred. / A New Metric for Evaluating Performance of REITs. In: Real Estate Finance. 2020 ; Vol. 36, No. 3. pp. 125-132.
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CHENG, J & LAM, A 2020, 'A New Metric for Evaluating Performance of REITs.', Real Estate Finance, vol. 36, no. 3, pp. 125-132.

A New Metric for Evaluating Performance of REITs. / CHENG, Joseph; LAM, Alfred.

In: Real Estate Finance, Vol. 36, No. 3, 01.2020, p. 125-132.

Research output: Journal PublicationsPolicy or Profession paper

TY - JOUR

T1 - A New Metric for Evaluating Performance of REITs.

AU - CHENG, Joseph

AU - LAM, Alfred

PY - 2020/1

Y1 - 2020/1

N2 - It has been suggested that conventionalearnings are a poor metric for evaluating the Real Estate Sector which comprises mainly Real Estate Investment Trusts (REITs) because conventional accounting practice “implicitly assumes that the value of real estate assets diminishes predictably over time.” Thus, Funds From Operations (FFO) recently has been proposed as an alternative metric for evaluating REIT performance. This article sets forth a proposition that REITs with debts might be better evaluated by the Unlevered EPS (earnings per share), which is derived by purging out the portion of earnings contributed by financial leverage. Furthermore, relative performance of REITs might be better evaluated by Unlevered Funds From Operations per Share (FPSU), whose portion attributed to debt is also purged out. These unlevered earnings metrics, which are Unlevered EPS (EPSU), and Unlevered Funds From Operations per Share (FPSU), may provide a clearer focus on earnings that are purely performance related. This article describes an interesting comparative study for these metrics which shows that the relative performance of REITs bears a stronger correlation withstandardized percentage change in unlevered earnings metrics than with the standardized percentage change in standard accounting earnings metrics, thereby highlighting the merit of disclosing the Unlevered EPS and UnleveredFPS to stakeholders as an additional information for a more precise evaluation of performance of REITs.

AB - It has been suggested that conventionalearnings are a poor metric for evaluating the Real Estate Sector which comprises mainly Real Estate Investment Trusts (REITs) because conventional accounting practice “implicitly assumes that the value of real estate assets diminishes predictably over time.” Thus, Funds From Operations (FFO) recently has been proposed as an alternative metric for evaluating REIT performance. This article sets forth a proposition that REITs with debts might be better evaluated by the Unlevered EPS (earnings per share), which is derived by purging out the portion of earnings contributed by financial leverage. Furthermore, relative performance of REITs might be better evaluated by Unlevered Funds From Operations per Share (FPSU), whose portion attributed to debt is also purged out. These unlevered earnings metrics, which are Unlevered EPS (EPSU), and Unlevered Funds From Operations per Share (FPSU), may provide a clearer focus on earnings that are purely performance related. This article describes an interesting comparative study for these metrics which shows that the relative performance of REITs bears a stronger correlation withstandardized percentage change in unlevered earnings metrics than with the standardized percentage change in standard accounting earnings metrics, thereby highlighting the merit of disclosing the Unlevered EPS and UnleveredFPS to stakeholders as an additional information for a more precise evaluation of performance of REITs.

KW - REAL estate investment trusts

KW - FINANCIAL leverage

KW - INTEREST rates

KW - ACCOUNTING standards

KW - LONG-term debt

M3 - Policy or Profession paper

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JO - Real Estate Finance

JF - Real Estate Finance

SN - 0748-318X

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