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Real Estate & REITs: Is PE Relevant with REITs?

Contributed by mm | December 10, 2003 9:25 PM PST

This Fool.com story highlights the fact that earnings may be distorted for REITs due to certain accounting requirements that especially affect companies in real estates. In particular, the following two accounting practices may make understanding real REIT earnings more difficult than it appears:

1) Depreciation Accounting:

Acquired properties are depreciated annual over a period of 30 to 40 years. REITs holding newly acquired properties are still depreciating the properties and earnings may be impacted negatively, while REITs with older properties may have depreciation all property values in the accounting books and thus earnings are free of depreciation charges.

2) Lack of Real Estate Value Appreciation Recognition:

REITs cannot recognize appreciation of properties until they are sold out. Therefore, in a typical setting, REITs' book value may be an understatement of the real value of the lands and buildings.

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