The two re-leasing spreads a REIT reports, computed lease by lease on one quarter's signings, and why fixed escalators drive them apart.
A cash leasing spread compares the first cash rent of the new lease with the last cash rent of the lease it replaces; a GAAP spread compares the straight-line average rent of each. On three illustrative leases covering 100,000 sq ft of comparable space, the same signings give a cash spread of −0.3 per cent and a GAAP spread of +15.1 per cent. The gap is not an accounting trick to be ignored; it is the fixed escalators in the expiring leases, and the cash figure is the one that reaches AFFO.
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 →
Leasing spreads are the line in a REIT's supplemental package that tells you whether rents on the existing portfolio are rolling up or down. Most office, industrial and retail REITs report both a cash and a GAAP (straight-line) version, on comparable space only. Definitions vary by company, so the safe course is to rebuild one lease and see which numbers each version uses.
| Lease | Sq ft | Expiring lease | New lease |
|---|---|---|---|
| Suite 100, renewal | 50,000 | 10 yrs from 20.00, 3% bumps | 10 yrs from 25.00, 3% bumps, 6 months free |
| Suite 220, new tenant | 20,000 | 5 yrs from 30.00, 2.5% bumps | 5 yrs from 34.00, 2.5% bumps, 2 months free |
| Unit 4, renewal | 30,000 | 7 yrs flat at 18.00 | 7 yrs from 19.00, 3% bumps, 3 months free |
| Unit 9, vacant 18 months | 15,000 | none comparable | 5 yrs from 28.00 |
Expiring cash rent = 20.00 × 1.039 = 26.10 (year 10 of the old lease)
Cash spread = new starting rent ÷ expiring cash rent − 1 = 25.00 ÷ 26.10 − 1 = −4.2%
Old straight-line rent = total rent over the term ÷ term = 229.28 ÷ 10 = 22.93
New straight-line rent = (total rent − free rent) ÷ term = (286.60 − 12.50) ÷ 10 = 274.10 ÷ 10 = 27.41
GAAP spread = 27.41 ÷ 22.93 − 1 = +19.5%
In Excel, for a lease with start rent S, bump b, term n and f free months: =(S*((1+b)^n-1)/b-S*f/12)/n for the straight-line rent.
Same tenant, same space, same quarter: one measure says the rent fell 4.2 per cent, the other that it rose 19.5. Both are correct. Over ten years market rent for the suite rose from 20.00 to 25.00, about 2.26 per cent a year, while the old lease's bumps compounded at 3 per cent. The tenant was paying above market by the end of the lease, so cash rent rolls down. The straight-line average of the old lease, 22.93, sits well below the market rent of today, so the GAAP spread rolls up.
| Lease | Expiring cash | New cash | Cash spread | Old straight-line | New straight-line | GAAP spread |
|---|---|---|---|---|---|---|
| Suite 100 | 26.10 | 25.00 | −4.2% | 22.93 | 27.41 | +19.5% |
| Suite 220 | 33.11 | 34.00 | +2.7% | 31.54 | 34.61 | +9.7% |
| Unit 4 | 18.00 | 19.00 | +5.6% | 18.00 | 20.12 | +11.8% |
| Weighted, 100,000 sq ft | 25.07 | 25.00 | −0.3% | 23.17 | 26.66 | +15.1% |
The weighted spread is the ratio of area-weighted rents, not the average of the three percentages. Unit 9 is left out: after 18 months empty there is no expiring rent to compare with, so the reported spreads cover 87.0 per cent of the 115,000 sq ft leased. A company that included it at a notional prior rent, or that set a looser vacancy cut-off, would report different numbers on the same leases.
| Annual bump | Expiring cash rent | Cash spread | Old straight-line | New straight-line | GAAP spread |
|---|---|---|---|---|---|
| 0% | 20.00 | +25.0% | 20.00 | 23.75 | +18.8% |
| 2% | 23.90 | +4.6% | 21.90 | 26.12 | +19.3% |
| 3% | 26.10 | −4.2% | 22.93 | 27.41 | +19.5% |
| 4% | 28.47 | −12.2% | 24.01 | 28.77 | +19.8% |
The GAAP spread barely moves with the escalator, from 18.8 to 19.8 per cent, because it compares two averages that both rise with the bumps. The cash spread swings from +25.0 to −12.2 per cent. A sector that writes long leases with high fixed bumps will report wide GAAP spreads and narrow, sometimes negative, cash spreads even when market rents have grown; a sector with flat leases reports the cash spread above the GAAP one, because the free rent in the new lease pulls its straight-line average below the starting rent: +25.0 against +18.8 per cent at 0 per cent bumps.
The common mistake is to read the GAAP spread as the rent growth the portfolio will deliver. Straight-line rent is removed in AFFO, and same-store cash NOI moves with the cash spread, not the GAAP one. In this quarter the cash rent on the space that rolled is essentially flat, 25.07 before and 25.00 after, and the six months of free rent on Suite 100 cut first-year cash further. Use the cash spread to forecast cash NOI and AFFO, as in how to calculate same-store NOI growth, and the GAAP spread only to understand reported earnings.
Compute both spreads from the lease terms: last cash rent against first cash rent, straight-line against straight-line, weighted by area, on comparable space only. Here they are −0.3 and +15.1 per cent on the same leases, and the escalator explains nearly all of the difference. The lease roll costed lease by lease for the book's worked REIT is in the free workbook for this case.
Because fixed escalators lift the last cash rent of the expiring lease above its straight-line average, while the new lease's straight-line rent sits above its starting rent. On the illustrative 10-year lease with 3 per cent bumps, the expiring tenant pays 26.10 against a straight-line 22.93, so a new 25.00 rent is -4.2 per cent cash and +19.5 per cent GAAP.
The cash spread, because AFFO strips out straight-line rent. In the illustrative quarter, cash rent on 100,000 sq ft of comparable space is flat, 25.07 expiring against 25.00 new, a -0.3 per cent spread, even though the GAAP spread reports +15.1 per cent.
Usually space that has been vacant longer than a set period, often twelve months, plus new developments and first-generation space, because there is no comparable expiring rent. Here a 15,000 sq ft unit vacant for 18 months is left out, so the spreads cover 87.0 per cent of the space leased.
This article is one calculation from 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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