REIT Earnings Measure
Gains Additional Clarity

WASHINGTON -- REIT accountants can breathe a sigh of relief. The real-estate investment trust industry has decided to clarify the definition of its supplemental earnings measure in an effort to comply with a recent accounting rule on asset sales that could have forced companies to restate downward current and past financial results.

The move by the National Association of Real Estate Investment Trusts was prompted by a February ruling by the Financial Accounting Standards Board that requires firms to classify gains and losses from sales of investment properties -- and operating earnings from the properties -- as discontinued operations when calculating net income under generally accepted accounting principles. There was widespread concern in the REIT industry and among analysts that the FASB ruling, which became effective for the just-ended first quarter, could have had a negative effect on REITs' supplemental earnings measure, funds from operations, which excludes gains and losses on asset sales and earnings from discontinued operations.

In clarifying its guidance for REIT earnings, Nareit said its board of governors decided that REITs should include in funds from operations the results of discontinued operations as defined by FASB. However, funds from operations should continue to exclude gains and losses from asset sales and add back real-estate depreciation, Nareit said.

For example, without the clarification, the ruling would have meant that if a REIT sold a building during the first quarter, it would have to remove the operating earnings from that building from its funds from operations for the current quarter and the year-earlier quarter. As a result, funds from operations would have to be restated for the year-earlier quarter.

"I'm glad Nareit listened to its members who said the ruling would make it difficult and confusing for companies to adopt and hard to make year-over-year results comparable," says Lawrence D. Raiman, an analyst at Credit Suisse First Boston Corp. in New York. "The ruling would have required continuous restatements of prior periods. The key concern was to keep results comparable."

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