A critical metric in real estate investment trusts (REITs) analysis, this financial assessment offers an alternative view of a company’s ability to generate cash flow compared to traditional net income. It starts with net income, adding back depreciation and amortization, and subtracting any gains from property sales while adding back any losses. The result provides a more accurate picture of a REIT’s ongoing operating performance. For example, a REIT with a net income of $1 million might have depreciation expenses of $500,000. In this case, its operating performance, before accounting for any gains or losses on sales, would be $1.5 million.
This calculation is important because depreciation, a non-cash expense, significantly impacts net income for REITs, which typically hold large amounts of depreciable real estate assets. By adding back depreciation, and adjusting for gains/losses on property sales, analysts gain a better understanding of a REIT’s sustained ability to pay dividends. This metric is also used to compare the operational performance of different REITs, especially when coupled with other financial ratios. It provides a more stabilized view of a REIT’s earnings, eliminating the fluctuations from one-time property sales.
