Disclosing interest expense in financial statements of firms that self‐construct assets: the effect on financial analysis of real estate investment trusts

Abstract

Statement of Financial Accounting Standards (SFAS) 34 requires firms that develop or self-construct their own assets to capitalize related interest payments. As a result, the reported interest expense of self-constructing firms may be understated, and earnings per share overstated. This study compares key profitability ratios between Real Estate Investment Trusts (REITs) that actively self-construct properties with REITs that do not. It was found that self-constructing REITs will report significantly favourable profitability ratios as compared with REITs that invest in fully developed properties. Because many REITs do self-construct, explicit capitalized interest expense disclosure are recommended so that financial analysts can make appropriate comparisons.

Earnings management practices of the lodging industry: Diverging behaviors of lodging real estate investment trusts and lodging C-corps

“…To reconcile the shortcoming of traditional earnings, depreciation expenses are not subtracted from net income to calculate REITs' FFO. Since FFO are better than traditional earnings figures at capturing REITs' true performance, market participants and financial analysts commonly use the FFO per-share instead of earnings per share (EPS) when evaluating the performance of REITs (Oppenheimer and Hansz, 2005).…”