IDEAS home Printed from https://ideas.repec.org/a/jre/issued/v33n32011p415-442.html
   My bibliography  Save this article

Funds from Operations Versus Net Income: Examining the Dividend-Relevance of REIT Performance Measures

Author

Listed:
  • Danny Ben-Shahar

    (Technion – Israel Institute of Technology)

  • Eyal Sulganik

    (The Interdisciplinary Center Herzliya)

  • Desmond Tsang

    (McGill University)

Abstract

While the Real Estate Investment Trusts (REITs) industry is traditionally viewed as a cash flow business, REIT investors have also relied on Funds from Operations (FFO) and net income to evaluate company performance. In this study, we compare FFO and net income by examining how well these two performance measures explain dividend policy of REITs beyond operating cash flows. Our investigation extends over the period of 2001-2008, subsequent to the provision of the new FFO definition by the National Association of Real Estate Investment Trusts (NAREIT). Specifically, by decomposing the performance measures into their cash and non-cash (accrual) components, we find that, while the non-cash component that is common to both FFO and net income is significantly associated with the level of dividends distributed by REITs, the additional non-cash component contained in net income but not in FFO has no association with dividends. We further find that the non-cash component in net income becomes significantly associated with dividends only when measurement errors in depreciation are low (i.e., reporting quality in depreciation is high). By suggesting that the inclusion of depreciation distorts the dividend-relevance of REIT net income, this paper provides further support to the dominance of FFO over net income for financial reporting in the REIT industry.

Suggested Citation

  • Danny Ben-Shahar & Eyal Sulganik & Desmond Tsang, 2011. "Funds from Operations Versus Net Income: Examining the Dividend-Relevance of REIT Performance Measures," Journal of Real Estate Research, American Real Estate Society, vol. 33(3), pages 415-442.
    • Handle: RePEc:jre:issued:v:33:n:3:2011:p:415-442
    as

    Download full text from publisher

    File URL: http://pages.jh.edu/jrer/papers/pdf/past/vol33n03/05.415_442.pdf
    File Function: Full text
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Seok, Sang Ik & Cho, Hoon & Ryu, Doojin, 2020. "The information content of funds from operations and net income in real estate investment trusts," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    2. Gene Birz & Erik Devos & Sandip Dutta & Khoa Nguyen & Desmond Tsang, 2022. "Ex-ante performance of REIT portfolios," Review of Quantitative Finance and Accounting, Springer, vol. 59(3), pages 995-1018, October.
    3. Zhilan Feng & Zhilu Lin & Wentao Wu, 2022. "CEO Influence on Funds from Operations (FFO) Adjustment for Real Estate Investment Trusts (REITs)," The Journal of Real Estate Finance and Economics, Springer, vol. 65(3), pages 524-547, October.
    4. Elizabeth Devos & Erik Devos & He Li & Desmond Tsang, 2022. "Operating Lease as Alternative Financing for REITs: a Viable Strategy or a Sign of Trouble?," The Journal of Real Estate Finance and Economics, Springer, vol. 65(2), pages 153-180, August.
    5. Zhilan Feng & Stephen M. Miller & Dogan Tirtiroglu, 2020. "The Bennet Decomposition and Predictability of the U.S. REITs’ Profitability," Working papers 2020-11, University of Connecticut, Department of Economics.
    6. Erik Devos & Andrew Spieler & Desmond Tsang, 2014. "Elective Stock Dividends and REITs: Evidence from the Financial Crisis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 42(1), pages 33-70, March.
    7. George D. Cashman & David M. Harrison & Christine A. Panasian, 2016. "Clawback Provisions In Real Estate Investment Trusts," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 39(1), pages 87-114, March.
    8. Robert Edelstein & Steve Fortin & Desmond Tsang, 2012. "An International Exploration of Financial Reporting Practices in the Real Estate Industry," International Real Estate Review, Global Social Science Institute, vol. 15(3), pages 347-372.
    9. Yener Cos‚kun & A. Sevtap Selcuk-Kestel & Bilgi Yilmaz, 2017. "Diversification benefit and return performance of REITs using CAPM and Fama-French: Evidence from Turkey," Borsa Istanbul Review, Research and Business Development Department, Borsa Istanbul, vol. 17(4), pages 199-215, December.

    More about this item

    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:jre:issued:v:33:n:3:2011:p:415-442. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: JRER Graduate Assistant/Webmaster (email available below). General contact details of provider: http://www.aresnet.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.