The Nareit EBITDAre bridge, the pro forma adjustment, and the joint venture debt and preferred equity that a reported ratio often leaves out.
Net debt to EBITDAre is total debt less cash, divided by EBITDA computed on Nareit's real estate definition: net income plus interest, taxes, depreciation and amortisation, plus impairments of depreciated property, less gains (or plus losses) on its sale, with joint ventures on the same basis. On an illustrative REIT with 3,940 million of net debt and 736 million of EBITDAre, the ratio is 5.35x. The same balance sheet can be shown anywhere from 5.13x to 6.16x depending on which EBITDAre and which debt are used, so the definition matters more than the division.
Worked in full in REIT Analysis and Valuation by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Leverage is the first test in any REIT credit or equity review, because a REIT pays out most of its earnings and cannot retain its way out of too much debt. Nareit introduced EBITDAre in its 2017 white paper so that companies would at least start from the same earnings line; the definition also removes gains and losses on a change of control and impairments of investments in joint ventures that stem from a fall in the value of their depreciated property. What sits around that line still varies, and a full turn of leverage can hide in the choices.
| Line | Amount |
|---|---|
| Net income | 240.0 |
| Interest expense | 145.0 |
| Income taxes | 4.0 |
| Depreciation and amortisation | 380.0 |
| Impairment of depreciated real estate | 18.0 |
| Gains on sale of depreciated real estate | 72.0 |
| Adjustment to put unconsolidated JVs on an EBITDAre basis, at share | 21.0 |
| Total debt / cash | 4,100.0 / 160.0 |
| Preferred equity | 300.0 |
| Share of unconsolidated JV debt | 350.0 |
EBITDAre = net income + interest + taxes + D&A + impairment of depreciated property − gains on its sale ± JV adjustments
Net debt to EBITDAre = (total debt − cash) ÷ EBITDAre
In Excel, with the bridge in B2:B8 and gains entered as a negative, =SUM(B2:B8) gives 736.0, and =(B10-B11)/B9 gives the ratio.
Net income of 240.0 plus 145.0 of interest, 4.0 of tax and 380.0 of D&A is a plain EBITDA of 769.0. Add back the 18.0 impairment, deduct the 72.0 gain and add 21.0 for the joint ventures, and EBITDAre is 736.0. Net debt is 4,100.0 less 160.0, or 3,940.0. Divide: 5.35x.
Most REITs then publish an adjusted EBITDAre that restates the year as if the portfolio at year end had been owned all year. Here that adds 24.0 for a full year of the assets bought during the year and removes 15.0 for the assets sold, giving 745.0 and 5.29x. The adjustment is legitimate, because the debt at year end funds the year-end portfolio, but it is the company's own estimate and should be read line by line.
| Definition | Numerator | Denominator | Ratio |
|---|---|---|---|
| Last quarter's EBITDAre of 192.0, annualised | 3,940.0 | 768.0 | 5.13x |
| Pro forma adjusted EBITDAre | 3,940.0 | 745.0 | 5.29x |
| Nareit EBITDAre, as reported | 3,940.0 | 736.0 | 5.35x |
| Adding JV debt at share | 4,290.0 | 745.0 | 5.76x |
| Adding JV debt and preferred equity | 4,590.0 | 745.0 | 6.16x |
The range is 1.03 turns on one balance sheet. Of the five, the annualised quarter is the most flattering because it carries a quarter that happened to be strong into a full year. The two lower rows are, for most purposes, the more honest ones. EBITDAre already counts the REIT's share of joint venture earnings through the 21.0 adjustment, so leaving out its 350.0 share of the joint ventures' debt puts income on the top line without the borrowing that produced it. Preferred equity is not debt in law, but its dividend is fixed and ranks ahead of common shareholders, which is why rating agencies commonly treat at least part of it as debt.
A plain EBITDA with the gain left in gives 769.0 and 5.12x, the lowest figure on the page. A REIT that sells buildings at a profit every year will look less levered on plain EBITDA for as long as it has buildings to sell. EBITDAre removes the gain for exactly that reason.
Leverage moves with how acquisitions are paid for. Take a 1,000 million purchase at a 6.0 per cent cap rate, adding 60.0 of NOI to the 745.0 adjusted EBITDAre.
| Funding | Net debt | EBITDAre | Ratio |
|---|---|---|---|
| All equity | 3,940.0 | 805.0 | 4.89x |
| Half debt, half equity | 4,440.0 | 805.0 | 5.52x |
| All debt | 4,940.0 | 805.0 | 6.14x |
An all-debt deal at a 6.0 per cent yield adds debt at 16.7 times the income it buys, so it can only push the ratio up from 5.29x. To get back to 5.0x from today's position without buying anything, the REIT would need to repay 215.0 of debt. Going the other way, adjusted EBITDAre could fall 11.9 per cent before the ratio reaches 6.0x and 24.4 per cent before 7.0x.
The common mistake is to compare two REITs' published ratios without checking the definitions behind them. One company's 5.3x on reported EBITDAre with joint venture debt excluded and another's 5.8x with it included may describe the same leverage. Rebuild both on one basis: Nareit EBITDAre, adjusted for the year's acquisitions and sales, over net debt including joint venture debt at share, with preferred equity shown in a second line. Then put the ratio beside the interest cover, 5.08x here, and the maturity ladder, because a REIT at 5.3x with debt maturing next year can be riskier than one at 6x with nothing due for five. For a corporate borrower, where leases and pension deficits change the answer, the same ratio is worked in how to calculate net debt to EBITDA. How leverage feeds into what the shares are worth is worked in how to calculate a REIT's NAV per share, and the earnings line that sits beside it in how to calculate a REIT's FFO from net income.
REIT Analysis and Valuation works leverage and coverage as one step of a complete analysis of a single industrial REIT, from the filings to the recommendation; the free workbooks for this case carry the leverage tests, the dividend coverage and the break-evens as live formulas.
EBITDAre is Nareit's real estate version. It starts from EBITDA, then adds back impairments of depreciated property, removes gains and losses on its sale, and puts joint ventures on the same basis. On the illustrative REIT here plain EBITDA is 769.0 million and EBITDAre 736.0, mainly because a 72.0 million gain on sale is removed.
There is no single threshold, but the test is how far earnings can fall before leverage becomes a problem. On this REIT, at 5.29x on adjusted EBITDAre, earnings could fall 11.9 per cent before the ratio reaches 6.0x and 24.4 per cent before 7.0x. Read it beside interest cover, 5.08x here, and the debt maturities.
For credit purposes it is usually at least partly treated as debt, because its dividend is fixed and ranks ahead of common equity. Adding 300 million of preferred and 350 million of JV debt at share takes this REIT from 5.29x to 6.16x on adjusted EBITDAre. Show both figures rather than choosing one.
Leverage and coverage are steps of the complete analysis of one REIT worked in chapter 19 of REIT Analysis and Valuation. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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