NAREIT FINANCIAL STANDARDS WHITE PAPER SEPTEMBER 2017

Earnings Before , Taxes, and Amortization for Real Estate

Now that real estate INTRODUCTION about REITs as real estate companies in support is a top-line sector in On Aug. 31, 2016, S&P Dow Jones Indices and of growing interest among generalist investors. the equities market, MSCI moved stock-exchange listed REITs The conclusion was reached that, while dedicated it will be useful to and other listed real estate companies from REIT investors have long been accustomed to have a common EBITDA-related the Financials Sector of their Global Industry utilizing the industry’s supplemental measures (e.g., reference point for Classification Standard (GICS®) to a new Real funds from operations (FFO) and net operating real estate companies Estate Sector. GICS® is the industry classification income (NOI)) to evaluate the investment quality from which they may methodology that investors rely on for their of REITs as real estate companies, it would be choose to adjust to explain and highlight proprietary stock market indices and it serves as helpful to generalist investors for REITs as real their enterprise-wide the primary classification system for equities for estate companies to also provide a more widely investment attributes. investors around the world. The Real Estate Sector known and understood supplemental measure of is the first new headline sector added since GICS® performance – EBITDA for real estate. was created in 1999. Equity REITs make up about In this context, it is important to underline that the 98 percent of the equity market capitalization of development of a uniform definition of EBITDA this Real Estate Sector in the U.S. in 2017. Some for real estate (i.e., EBITDAre) is not intended to While dedicated REIT real estate management and brokerage companies replace NAREIT-defined FFO as a supplemental investors have long make up the remainder. been accustomed to performance measure. FFO, a defined measure utilizing the industry’s Similarly, in a Sept. 6, 2017 press release, FTSE that NAREIT standardized in 1991, provides a supplemental uniform supplemental basis for evaluating the measures (e.g., funds Russell, the other leading operator of a global from operations classification system for equities, announced that earnings performance of REITs considering the (FFO) and net listed real estate companies that currently are unique capital structure of each REIT. The SEC operating income included in the Financials industry of its Industry staff has accepted NAREIT’s definition of FFO (NOI)) to evaluate the investment quality of Classification Benchmark (ICB) will be moved to in effect as of May 17, 2016 as a performance REITs as real estate a newly created 11th headline industry named Real measure and does not object to its presentation companies, NAREIT Estate at the market close on Dec. 31, 2018. on a per share basis as reflected in the Answer to believes that it Question 102.01 of its Compliance and Disclosure would be helpful to Considering these changes and the expectation generalist investors Interpretations on Non-GAAP Financial Measures for REITs as real that they will bring about greater interest in REITs issued on May 17, 2016. FFO is often used as a basis estate companies as real estate companies among investors over to measure the equity value of a REIT by applying to also provide a the long term, at its meeting on Feb. 23, 2016, valuation multiples to FFO. NAREIT anticipates that more widely known NAREIT’s Executive Board discussed the merits of and understood EBITDAre will become an additional supplemental supplemental measure NAREIT developing a standardized performance non-GAAP performance measure independent of of performance – measure based on Earnings Before Interest, Taxes, a company’s capital structure that will provide a EBITDA for real estate Depreciation and Amortization (EBITDA) that (EBITDAre). uniform basis to measure the enterprise value of a would provide additional relevant information company.

1 MANAGEMENT RESPONSIBILITY EBITDAre should only be used when the related NAREIT anticipates NAREIT reiterates its long-held belief that the measure is calculated in accordance with the that EBITDAre will management of each of its member companies NAREIT definition described in this White Paper. become an additional supplemental non- has the responsibility and authority to provide Any measure derived from NAREIT-defined GAAP performance accurate and material financial information that EBITDAre should be labeled appropriately to measure independent it regards as useful to the investment community, distinguish it from NAREIT-defined EBITDAre. In of a company’s capital structure that will within the limits prescribed by securities laws and addition, any adjusted EBITDAre measure should provide a uniform regulations. NAREIT-defined EBITDAre provides be reconciled to EBITDAre as defined in this basis to measure the REIT management with White Paper. enterprise value of a an optional reporting DEFINITION OF EARNINGS BEFORE company. INTEREST, TAXES, DEPRECIATION If a REIT reports tool to provide an AND AMORTIZATION FOR REAL ESTATE both EBITDAre and additional performance adjusted EBITDAre measure to investors to NAREIT has defined EBITDAre as follows: and provides earnings facilitate the evaluation GAAP guidance based on and comparison of adjusted EBITDAre, it Plus, interest REITs operating as real would be important to estate companies. Plus, income tax expense provide guidance based EBITDAre is a non- Plus, depreciation and amortization on NAREIT-defined EBITDAre as well. GAAP measure and, Plus, or minus losses and gains on the therefore, its reporting disposition of depreciated property, including is subject to SEC rules losses/gains on change of control REPORTING GUIDANCE governing the reporting Plus, impairment write-downs of depreciated Reconciliation and of non-GAAP measures. property and of investments in unconsolidated Prominence Companies should affiliates caused by a decrease in value of refer to SEC guidance depreciated property in the affiliate EBITDAre, like any other in Regulation S-K, Item Adjustments to reflect the entity’sshare of non-GAAP measure, 10-(e) Use of non-GAAP EBITDAre of unconsolidated affiliates must be quantitatively financial measures in reconciled to the Equals EBITDAre Commission filings1, most comparable and Regulation G measure calculated in General Rules regarding accordance with GAAP. disclosure of non-GAAP In addition, the GAAP financial measures for measure should be relevant guidance on disclosure, reconciliation and given equal or greater prominence. presentation requirements for reporting non- Adjustments to GAAP Net Income should include GAAP measures. adjustments necessary to translate equity in earnings of unconsolidated affiliates included Under certain circumstances, a REIT may choose in GAAP Net Income to equity in EBITDAre of to report an adjusted version of EBITDAre not unconsolidated affiliates. consistent with the definition in this White Paper. In these cases, the REIT should clearly label NAREIT-defined EBITDAre of the reporting entity the measure as adjusted EBITDAre. The label includes 100 percent of EBITDAre of consolidated

1 See, SEC, Conditions for Use of Non-GAAP Financial Measures and Use of Non-GAAP Financial Measures in Commission Filings (March 28, 2003), available at https://www.sec.gov/rules/final/33-8176.htm.

See also, SEC, The Use of Non-GAAP Financial Measures (May 17, 2016) available at https://www.sec.gov/divisions/corpfin/guidance/nongaapinterp.htm

2 affiliates with non-controlling . The depreciation and amortization of uniquely rationale for this treatment is that 100 percent significant to real estate. SeeNAREIT’s FFO White of the of these entities is reported in the Paper for further clarification. Depreciation and consolidated of the reporting entity. amortization adjustments to calculate EBITDAre Therefore, consolidated EBITDAre would provide a should include all depreciation and amortization valid comparison with consolidated debt. included in GAAP Net Income.

In addition, including 100 percent of EBITDAre Gains and Losses on the Disposition of of all consolidated affiliates, including those Depreciated Property with non-controlling interests, is consistent with As with FFO, to provide a supplemental GAAP in calculating Net Income under the same performance measure that provides a basis for circumstances. understanding comparable period–to-period Adjusted EBITDAre operating performance and a basis for forecasting As indicated above, EBITDAre may be used on-going operating performance, NAREIT’s for various financial analyses. Thus, it may be definition of EBITDAre excludes gains and losses appropriate to adjust NAREIT-defined EBITDAre on the disposition of depreciated property. to facilitate these analyses. For example, some Some REITs sell assets, including undepreciated companies may want to present an adjusted property, incidental to their main business, EBITDAre to mirror EBITDA defined in debt most often sales of securities or parcels of covenants. Other companies may want to report land peripheral to operating properties. The adjusted EBITDAre that appropriately reflects the prohibition against the inclusion of gains or losses relationship between EBITDAre and reported debt on property sales in EBITDAre was not meant to allow a rational debt-to-EBITDAre relationship. to address this kind of activity, but rather the And still other companies may want to report gain or loss on previously depreciated operating EBITDAre applicable to specific security holders properties. Those REITs that choose to include (e.g., EBITDAre applicable to common shares). such gains or losses on sales of securities or NAREIT cautions companies to clearly label undepreciated land in their EBITDAre should any adjusted EBITDAre metric reported (e.g., disclose the amount of such gains or losses for Adjusted EBITDAre, excluding the non-controlling each applicable reporting period. Those that do interest in EBITDAre of consolidated entities). In not should address the amount of such gains addition, these adjusted EBITDAre metrics should or losses in their reconciliation of Net Income to be reconciled to NAREIT-defined EBITDAre, in EBITDAre. addition to Net Income. Impairment Write-downs Interest Expense As with FFO, the rationale for excluding If interest expense reported on the income impairment write-downs from EBITDAre is that statement includes gains/losses on early these write-downs generally represent the early extinguishment of debt and/or interest income, recognition of losses on disposition of depreciated such amounts should be disclosed. properties, which are excluded from the EBITDAre measure. Depreciation and Amortization EBITDAre is Not Intended to be a Measure of a The adjustments to Net Income for depreciation REIT’s Flow and amortization may be different than the depreciation and amortization adjustments used Importantly, EBITDAre is not intended to be in the calculation of FFO. The depreciation and used as a measure of cash generated by a REIT’s amortization expense added back to Net Income operations nor of its dividend-paying capacity. in the calculation of FFO should only include NAREIT believes that the statement of cash flows

3 prepared in accordance with GAAP, along with of EBITDA reported by REITs would be useful to a company’s supplemental disclosures, provide both dedicated real estate and generalist investors adequate information for investors and analysts and investment analysts. In a NAREIT survey, most to assess the current and prospective cash generalist investors indicated that they adjust generated and used by REITs. reported EBITDA to make uniform comparisons between companies and agreed that a common DEVELOPMENT OF EBITDAre definition would be useful in comparing the NAREIT examined non-GAAP measures operating performance and various measures reported by REITs other than NAREIT FFO. This derived from EBITDA between REITs. examination revealed that many REITs report NAREIT Executive Board Task Force and Best EBITDA in addition to FFO and NOI. It also Financial Practices Council Assistance and Review revealed that these EBITDA measures are based on a wide range of definitions. Many adjustments In 2016, a NAREIT task force was created to are made to “normalize” reported EBITDA to provide advice and guidance for NAREIT’s work provide comparable EBITDA measures between on this initiative. The task force consisted of reporting periods for a specific company. These the chief financial officers of REITs represented adjustments included, but were not limited to, the on NAREIT’s Executive Board. The task force following: discussed the matter of REITs reporting EBITDAre and provided constructive input. Further, NAREIT • Stock–based compensation; consulted with its Best Financial Practices Council • Restructuring charges; in developing the White Paper. NAREIT’s Best • Gains/losses on early extinguishment of debt; Financial Practices Council consists of financial executives of NAREIT member companies, • Acquisition transaction costs; and, investors, sell-side analysts, and representatives • Costs of legal and regulatory defense costs. from the major public firms. Similar adjustments to arrive at “adjusted EBITDA” are made by companies in sectors outside of real IMPLEMENTATION AND NOTICES estate. There is no uniform definition of “adjusted NAREIT believes that public confidence in the EBITDA” in the other sectors. quality of reported results, and the adequacy Views of Industry Investors, Analysts and Others of disclosures as to the method of calculation of those results, are of paramount importance EBITDA is used by investors and analysts in a to the REIT industry. NAREIT also believes that number of ways in evaluating the investment certain non-GAAP supplemental information quality of a company, including: relating to operating performance can be valuable • As an overall screening tool; in explaining and clarifying financial results for • As the basis of measuring enterprise value; REIT investors. But these non-GAAP measures should be considered only in addition to, not • As an indicator of cash flow generated by as a substitute for, the information prepared in operations; accordance with U.S. GAAP and should never be • As a supplemental performance measure; and, used to obscure or diminish the prominence of • To measure debt service and fixed cost GAAP-reported results. coverage. EBITDAre is an optional supplemental non- NAREIT discussed with GAAP measure. Accordingly, the implementation preparers and users whether a common definition of the recommendations in this White Paper

4 should be subject to the business judgement of the management of each company. These recommendations are intended to be guidelines for management rather than a mandatory set of inflexible rules. They are not an indication that NAREIT or any of its members or advisors believe that any of the information discussed herein, measures or formulas are material to the investors of any REIT, or to the REIT sector. Nothing contained herein is intended or shall be construed to impose any legal obligation to follow these guidelines or any liability under the securities laws or otherwise for any failure to do so. NAREIT recognizes that in some situations it may be difficult to reconstruct comparable information for prior periods. Nevertheless, NAREIT encourages all companies to calculate and present EBITDAre consistently for all periods presented in supplemental financial information.

EFFECTIVE DATE NAREIT recommends that companies that report an EBITDA performance measure also report EBITDAre in all financial reports for periods beginning after Dec. 31, 2017.

NAREIT is the worldwide representative voice for REITs and publicly traded real estate companies with an interest in U.S. real estate and capital markets. NAREIT is not acting as an investment adviser, investment fiduciary, broker, dealer or other market participant, and no offer or solicitation to buy or sell any security or real estate investment is being made by this White Paper. The content in this White Paper is for informational purposes only and is not intended to be a solicitation re- lated to any particular organization, nor does NAREIT intend to provide investment, financial, legal or tax advice, and no information, services, or materials offered by or through this White Paper shall be construed as such.

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