At small banks for RE loans we worked off NOI. It was simple. For corp entities its vital to understand machinations and seasonality of working capital accounts (often clues to business health) before you eliminate variations in WC (yr/yr . qtr/qtr) from your CF analysis. This is often not done in the analysis I see of cash flow. Re-ocurring CF is what matters (less capx) . I have struggled with the "other" line item entries on public companies statements if material or re-occuring. Never gave ounce of thought to capitalized interest for REITs until you brought it up for ARE... Are their any other REITS in your purview this is a material number for (perhaps change in AFFO more than 5%?? ) Thanks.
ARE is the only REIT I know of with that degree of distortion from capitalized interest. Would love to hear more about why you see annual working capital variations as important and what clues would tell you there is a problem.
Thanks for follow up. I'm not really talking about REITS when it comes to working capital. Let me reflect on that for a bit.. I have been retired for a while..
As much time as you spend responding to your subscribers I did not want to just blow this off. Simple things like tracking efficiency ratios: inventory turnover A/R days/turnover , A/P accounts IE- why have they stopped paying their bills on time? Basically tracking the changes to the current asset conversion cycle. How fast or how well is the business managing it cash flow.. In my experience issues with a credit showed up frequently first in changes to the working capital accounts, especially newer businesses or companies making new and different products (why sudden increase in returns on sales?) Why the disproportionate increase in work in progress or inventory? - (stuffs not making it out the door for a variety of reasons-this is a bad omen.) Comparing W/C ratios to baselines established by RMA data for same industry SIC or NAICS codes then monitoring them each quarter. In small business one of the most frequent issues we saw with growing companies was failure to properly collect A/R resulting in cash flow problems. A growing company should grow A/R but certainly not disproportionately- many times in small comp the lower tier employees were put on collections, this is a bad idea. I tried to find some good examples / studies online but nothing seemed to fit the bill. This analysis does not really apply to large public REITS, and is certainly not the study of Astrophysical Plasmas or "Spooky interaction at a distance". Envy your field of study.. must have been fascinating to spend your life involved in that.
Thanks very much for taking time to remember and communicate that! What might be analogous for REITs would be abrupt changes in certain parameters -- rate of renewals and maintenance capex come to mind.
I had a lot of fun in my field of study. I'm also enjoying my current "field of study".
GOLD standard in quality ! Thank you for such an insightful article. So much better than fist pounding buy, the more it drops the more I buy type articles. Just this article is worth more than the subscription value for the year !
@paul drake I wonder if your readers appreciate how masterful this piece is. You have simplified an enormous amount of analysis on your part. Even so, I tend to skim read, and here I had to reread it slowly and carefully to really get the benefits. The greatest conceptual gem, for me, was your presentation of FFO, and even AFFO, vs. CfO, and how P/FFO is less meaningful (did you say junk?). It is a volatile time particularly internationally. Your vote for a somewhat negative domestic macroeconomic view (and therefore limited upside for RIETs) may be right. My own is for a somewhat positive macroeconomic outlook, for a couple of reasons: inflation coming down in most categories, U.S. economic growth, and rate increase being less likely than decreases or staying the same. One’s view is only a guess, but important to investing strategy. Having liquidated two REIT holdings at recent highs, I piled up some cash, which my view tells me to average into some REITs and no REITs as the recent interest rate increases push shares down. But I’ve been wrong before! Thanks much.
I absolutely do appreciate how good this article is! I read 5-10 articles a day but I only save 1-2 a month for reading in the future. this is one of those - thank you Paul.
Thanks. I'm not sure we differ much, as my best guess for the near term macro lines up with yours, more or less. It is the look ahead over a few years to a couple decades where my view is relatively negative.
At small banks for RE loans we worked off NOI. It was simple. For corp entities its vital to understand machinations and seasonality of working capital accounts (often clues to business health) before you eliminate variations in WC (yr/yr . qtr/qtr) from your CF analysis. This is often not done in the analysis I see of cash flow. Re-ocurring CF is what matters (less capx) . I have struggled with the "other" line item entries on public companies statements if material or re-occuring. Never gave ounce of thought to capitalized interest for REITs until you brought it up for ARE... Are their any other REITS in your purview this is a material number for (perhaps change in AFFO more than 5%?? ) Thanks.
ARE is the only REIT I know of with that degree of distortion from capitalized interest. Would love to hear more about why you see annual working capital variations as important and what clues would tell you there is a problem.
Thanks for follow up. I'm not really talking about REITS when it comes to working capital. Let me reflect on that for a bit.. I have been retired for a while..
As much time as you spend responding to your subscribers I did not want to just blow this off. Simple things like tracking efficiency ratios: inventory turnover A/R days/turnover , A/P accounts IE- why have they stopped paying their bills on time? Basically tracking the changes to the current asset conversion cycle. How fast or how well is the business managing it cash flow.. In my experience issues with a credit showed up frequently first in changes to the working capital accounts, especially newer businesses or companies making new and different products (why sudden increase in returns on sales?) Why the disproportionate increase in work in progress or inventory? - (stuffs not making it out the door for a variety of reasons-this is a bad omen.) Comparing W/C ratios to baselines established by RMA data for same industry SIC or NAICS codes then monitoring them each quarter. In small business one of the most frequent issues we saw with growing companies was failure to properly collect A/R resulting in cash flow problems. A growing company should grow A/R but certainly not disproportionately- many times in small comp the lower tier employees were put on collections, this is a bad idea. I tried to find some good examples / studies online but nothing seemed to fit the bill. This analysis does not really apply to large public REITS, and is certainly not the study of Astrophysical Plasmas or "Spooky interaction at a distance". Envy your field of study.. must have been fascinating to spend your life involved in that.
Thanks very much for taking time to remember and communicate that! What might be analogous for REITs would be abrupt changes in certain parameters -- rate of renewals and maintenance capex come to mind.
I had a lot of fun in my field of study. I'm also enjoying my current "field of study".
Thank you for this fantastic article about my favorite asset class. Masterful.
Thank you for reading and commenting (and liking).
GOLD standard in quality ! Thank you for such an insightful article. So much better than fist pounding buy, the more it drops the more I buy type articles. Just this article is worth more than the subscription value for the year !
Delighted to hear that! The goal is of course to deliver more value than that.
@paul drake I wonder if your readers appreciate how masterful this piece is. You have simplified an enormous amount of analysis on your part. Even so, I tend to skim read, and here I had to reread it slowly and carefully to really get the benefits. The greatest conceptual gem, for me, was your presentation of FFO, and even AFFO, vs. CfO, and how P/FFO is less meaningful (did you say junk?). It is a volatile time particularly internationally. Your vote for a somewhat negative domestic macroeconomic view (and therefore limited upside for RIETs) may be right. My own is for a somewhat positive macroeconomic outlook, for a couple of reasons: inflation coming down in most categories, U.S. economic growth, and rate increase being less likely than decreases or staying the same. One’s view is only a guess, but important to investing strategy. Having liquidated two REIT holdings at recent highs, I piled up some cash, which my view tells me to average into some REITs and no REITs as the recent interest rate increases push shares down. But I’ve been wrong before! Thanks much.
I absolutely do appreciate how good this article is! I read 5-10 articles a day but I only save 1-2 a month for reading in the future. this is one of those - thank you Paul.
👍
Thanks. I'm not sure we differ much, as my best guess for the near term macro lines up with yours, more or less. It is the look ahead over a few years to a couple decades where my view is relatively negative.