Cash Flows vs. Earnings in the Valuation of Equity REITs

Abstract

Executive Summary. This article examines the incremental information content of net income and cash flows for equity real estate investment trusts (REITs). REITs provide a natural setting for investigating which measure, earnings or cash flows, provides a better summary statistic of corporate value. No formal empirical analysis has been conducted for REITs however, and existing research for public firms in general provides mixed results.Using three alternative models, we find funds from operations (FFO) has a higher information content than net income, and contains incremental information beyond that contained in net income. Our results support the usefulness of the FFO measure for REITs.