What is the relationship of REIT's taxable income and FAD? I always thought REITs had little room for manœuver when it comes to retaining cash - not more than 10% of taxable income, which is presumably a portion of NOI after propex, insurance and other expenses and is equivalent to FAD, right?
But if a safe growing REIT is to retain 40% of FAD where do the remaining 30% come from?
The secret is that depreciation is a non-cash expense, but does reduce taxable income. There are lots of wrinkles, and some REITs disclose more information than others. But that is the main thing.
This is sooo good Paul.. I frankly still don't get the full understanding of calculations for issuing stock. Maybe if I write out the calculations with some examples it will click- I'm old and lazy I suppose. When capital recycling is done doesn't one need to offset gains with the loss of NOI growth from rent escalations of the sold Real Estate to discover the true benefit?
Yeah the stock issuing calculation takes effort to get one's head around.
As to capital recycling, to fully quantify it one would I think compare NOI and escalators for both the old and new properties. But also there is variable time between sale and new earnings, and that depends on details.
Great article, wow.
FAD is like Free Cash Flow for stocks.
Paul, the missing piece is assessing the business model of the REIT?
Yes business model is central to what their potential and risks are.
FAD is like DCF for midstreams. How to think about FCF depends on the centrality of the capex. Is it essential to the business or used for growth?
Should be mandatory reading for REIT CFOs!
What is the relationship of REIT's taxable income and FAD? I always thought REITs had little room for manœuver when it comes to retaining cash - not more than 10% of taxable income, which is presumably a portion of NOI after propex, insurance and other expenses and is equivalent to FAD, right?
But if a safe growing REIT is to retain 40% of FAD where do the remaining 30% come from?
The secret is that depreciation is a non-cash expense, but does reduce taxable income. There are lots of wrinkles, and some REITs disclose more information than others. But that is the main thing.
An entire book summarized in a single article. Wonderful!
This is sooo good Paul.. I frankly still don't get the full understanding of calculations for issuing stock. Maybe if I write out the calculations with some examples it will click- I'm old and lazy I suppose. When capital recycling is done doesn't one need to offset gains with the loss of NOI growth from rent escalations of the sold Real Estate to discover the true benefit?
Yeah the stock issuing calculation takes effort to get one's head around.
As to capital recycling, to fully quantify it one would I think compare NOI and escalators for both the old and new properties. But also there is variable time between sale and new earnings, and that depends on details.