Blackmont analyst Gail Mifsud has come up with new paradigm for measuring the health of real estate companies. She says funds from operations — a measure used by most real estate companies — has become misleading because of some of the one-time items being included when numbers are reported.
Ms. Mifsud said:
We find traditional line items misleading as some publicly traded companies have elected to modify the definition of FFO to suit their reporting purposes — including property sales and one-time gains, adjusting for foreign exchange, adding back real cash costs such as corporate reorganization, etc.
She says there are enough examples of this that it has become “necessary” to check and adjust the FFO numbers reported by management. “The FFO numbers ultimately stated in our publications rarely match the figures presented in quarterly reports,” said the analyst.
Ms. Mifusd has come up with two key measures of her own, adjusted cash flow (ACF) and funds available for distribution (FAD).
ACF starts with cash flow from operations from financial statements and then is adjusted for working capital items. Ms. Mifsud then takes her AFC figure and adjusts it for capital improvements and leasing costs to get her funds available for distribution.
Using her model, Canadian Real Estate Investment Trust is in the best shape in the REIT world, paying out only 63% of its FAD. First capital Realty Corp. (OTC:FCRGF) finishes second paying out 80% of FAD. The worst performers are Lakeview Hotel REIT at 243% of FAD and Killam Properties Inc. (OTC:KMPPF) at 181% of FAD.