Basic REIT Accounting

A significant part of conducting due diligence on a non-traded REIT investment involves analyzing its financial health and performance.

KEY POINT

Since non-traded REITs, by definition, do not trade on public markets and newer Net Asset Value (NAV) reporting standards are not yet common or standardized, a financial advisor and investor must rely on examining the financial statements of a non-traded REIT during the capital raising phase to determine, in part, whether it is prudent to invest in the fund.

This section is meant to serve as an introductory level lesson on what is included in reports to REIT shareholders and how to interpret this information to find guidance on the health of the REIT. In general, the focus is on items that are part of regular, periodic filings by the REIT to the Securities and Exchange Commission (SEC). These filings include quarterly Form 10-Qs as well as the annual Form 10-K.

It is not only advisable, it’s necessary, to review the reports in their totality when analyzing the REIT. The Management Discussion & Analysis (MD&A) section, the detailed Financial Statements, and all supplemental data can be particularly revealing.

TIP

Careful reading of footnotes is highly recommended as many topics are not addressed in a standardized way across REITs, and the footnotes will often give the detailed explanation needed to understand how to best interpret the numbers.