Glossary - Blue Vault

A - Z Glossary

Cash and Cash Equivalents
Includes both cash and cash equivalents as noted on the balance sheet. Restricted cash items are not included in this category due to certain limitations and restrictions on how these funds may be used.
Cash to Total Assets Ratio
This ratio looks at the amount of cash available for investment on the balance sheet and compares it to the total assets. Restricted cash is not included in this metric.
Debt Maturity
The due date for a debt when the principal must be repaid. The commercial real estate industry has a little over a trillion dollars in maturing loans coming due in the next few years. The challenge is renewing these loans in a time of tight credit and fallen real estate values.

If a REIT cannot refinance, it has to divest of assets, which reduces Funds from Operations (FFO) and endangers a payout to investors. If the majority of a REIT’s debt is maturing in the next 12-24 months, this could be an issue.
Debt to Total Assets Ratio
The ratio of Total Debt divided by Total Assets. There is no perfect debt level for a REIT; some sectors use more debt than others. But what was once considered reasonable debt can become a problem in a difficult economic environment. A careful REIT investor will look at both the Debt-to-Total Assets Ratio and the Interest Coverage Ratio to gauge if a REIT is overleveraged. Also, see the Debt Maturity schedule for any debt refinancing challenges on the horizon.
Distributions
Distributions paid during the indicated time frame.
FFO
Funds from Operations. Instead of reporting earnings like other companies, REITs report FFO. Why?

REITs have high depreciation expenses because of how properties are accounted for. But the properties don’t fall in value to zero like, say a piece of equipment would. So the high real estate depreciation charges—which are required accounting—can seem unfair given that real estate assets have historically appreciated and been sold for a profit. Besides, those depreciation expenses aren’t real cash being expensed anyway. It’s only a paper loss and not a cash loss. So FFO adds back the depreciation expenses—and makes other adjustments as well.

Keep in mind that FFO is a non-GAAP financial measure of REIT performance. GAAP stands for Generally Accepted Accounting Principles. Non-GAAP means that FFO is not an accounting standard.

The National Association of Real Estate Investment Trusts (NAREIT) has defined FFO as:

Net Income

+ Depreciation

-/+ Gains/Losses on Property Sales (removes one-time items)

-/+ Adjustments for unconsolidated joint ventures and partnerships

Unfortunately, the NAREIT definition isn’t uniform in practice. Not every REIT calculates FFO according to the NAREIT definition. Or they may interpret the NAREIT definition differently.

Blue Vault presents FFO in keeping with the NAREIT definition to the best of its ability, given the public information made available by each REIT in the quarterly filings. We may attempt to deduce FFO for nontraded REITs that are not forthcoming, but cannot guarantee the accuracy.

FFO does have some limitations:

FFO is an accrual measure of profitability, not a cash measure of profitability. That is because FFO (and net income) records income and expenses, regardless of whether or not cash has actually changed hands.

The NAREIT definition of FFO also does not take into account one-time items—those gains or losses that aren nonrecurring.

FFO contains another weakness: it does not subtract out the capital expenditures required to maintain the existing portfolio of properties. Real estate holdings must be maintained, so FFO is not quite the true residual cash flow remaining after all expenses and expenditures.

FFO is an imperfect measure of REIT performance, but it is the best that we have for the nontraded REIT industry at this time. Blue Vault is employing the NAREIT definition and adjusting company-reported FFO to comply with NAREIT whenever possible.
Gross Dollars Raised
Sales of nontraded REIT shares, including those purchased with reinvested dividends.
Inception Date
The date when each REIT reported the commencement of fundraising activities for the public offering. The commencement date for an initial private offering of securities (if applicable) was not taken into consideration.
Interest Coverage Ratio
Earnings before Interest, Taxes, Depreciation, and Amortization or EBITDA, divided by the Interest Expense.
EBITDA or Adjusted EBITDA/Interest Expense
Since it’s tough to gauge how much debt is too much or too little, the Interest Coverage Ratio is another clue to a REIT’s debt health.

The Interest Coverage Ratio is a measure of a REIT’s ability to honor its debt interest payments. A high ratio means that the company is more capable of paying its interest obligations from operating earnings. So even if interest costs increase due to higher costs of borrowing, a high Interest Coverage Ratio shows that a REIT can handle those costs without undue hardship.

The analyst community typically looks for an Interest Coverage Ratio of at least two (2)—that is, profits are at least twice the costs of interest expenses—to maintain sufficient financial flexibility. That said, an interest-coverage ratio of 1.5 is generally considered the bare minimum level of comfort for any company in any industry.

At minimum, the ratio should be consistent quarter after quarter, year after year. Improving interest coverage is a positive signal of the company’s overall health, and a declining pattern is a danger sign of financial trouble, which may be imminent or far off into the future. However, a declining ratio does not automatically mean death for the company, since a temporary change in operations can result in a blip in earnings.

In general, a very low coverage ratio can indicate higher risk. On the other hand, a very high interest coverage ratio may suggest that the company is missing out on opportunities to expand its earnings through leverage.
Lease Expirations
Date when the lease ends and the landlord will need to re-lease the space.
MFFO
Modified Funds from Operations. Blue Vault’s FFO presentation for each REIT is in accordance with the NAREIT definition to the best of its ability. Both FFO and MFFO have been provided for comparison purposes.

Modified FFO, or MFFO, is a supplemental measure that can vary from REIT to REIT. All REITs are different to some degree from one another, and present their supplemental measurements differently, depending upon their operational activity. MFFO is intended to give a sharper representation of a REIT’s true cash flows, that is, cash flow from operations.

To calculate MFFO, some REITs add back only Acquisition Costs to FFO. That’s because Acquisition Costs arguably penalize REITs in the acquisition phase. Other REITs also add back write-down charges (impairments) or adjust for other one-time charges, since they are not recurring in nature. Still others will include an adjustment for straight-lining rents. So one REIT’s reported MFFO may not be comparable to another REIT’s reported MFFO, yet it is valuable insight into real estate operational performance. The REITs are trying to give a clearer picture of their cash flow given the limitations of FFO. For REITs that do not report MFFO, Blue Vault’s MFFO estimates entail adding back Acquisition Costs to FFO.

AFFO, or Adjusted Funds From Operations, which is also subject to varying methods of computation–is generally equal to the REIT’s Funds From Operations (FFO) with adjustments made for recurring capital expenditures used to maintain the quality of the REIT’s underlying properties. The calculation also includes adjustments for straight-lining rents, leasing costs, and other material factors. One REITs AFFO isn’t necessarily the same as another REIT’s MFFO.

Despite the differences and the variability, both of these non-GAAP metrics are considered a more accurate measure of residual cash flow for shareholders than simple FFO. They provide for a better predictor of the REIT’s future ability to pay dividends. So keep these supplemental measures in mind while reviewing FFO calculations for each REIT.

(See also FFO definition)
Payout Ratios (Also Referred to as Distribution Coverage)
How much of the Funds from Operations (FFO) or Modified Funds from Operations (MFFO)—that is, the income from operations—is used to pay the distributions. If the Distribution Coverage Ratio is over 100%, then the REIT is using money from other sources—outside of income—to pay distributions.
Rankings
We rank each nontraded REIT against the pool of REITs that have a single-page report and exclude those REITs that are classified as having limited operations. These rankings will change from quarter to quarter. In addition, for those REITs that did not have a meaningful number, or did not report information for a certain category, those REITs have also been excluded from the rankings.
Real Estate Assets
Property, land, and buildings under construction. It also includes investments in other real estate ventures, real estate loans, etc.
Redemptions
REIT shares bought back from the shareholder/investor by the REIT under a program referred to as the Share Redemption Program (SRP), to provide investors with a limited form of liquidity. This Program is severely limited in the number of shares that can be repurchased annually. Most REITs also have a provision that allows them to suspend this liquidity feature upon Board approval.

Share redemption ratios are provided for comparison purposes only and may not be calculated in the same manner in which each individual REIT’s share redemption program guidelines dictate. With that in mind, please refer to the individual REIT offering documents for more details. In an attempt to standardize this metric and make general program comparisons, we calculate redemption ratios by dividing the actual number of shares redeemed by the weighted-average number of shares outstanding at the end of each quarter.
Securities
Marketable securities.