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Firms to Analyze REITs Based on Net Income


NEW YORK — Salomon Smith Barney Inc., Deutsche Banc Securities and 14 other Wall Street firms agreed to use net income in addition to a measure of cash flow as their primary tools to value real estate investment trusts.

In a vote Friday, the analysts agreed to forecast REIT results based on net income before gains or losses on real estate as defined by accountants as well as a figure called "funds from operations."

The move highlights an effort by REITs to become more like the rest of corporate America, and comes as the Securities and Exchange Commission cracks down on results that are prepared differently than required accounting rules.

Funds from operations isn't audited or recognized by the board of Generally Accepted Accounting Principles, prompting wide interpretation among REITs of what to include in the figure. Using the same measure of earnings as other companies may make investors more comfortable about buying REITs, analysts said.

"FFO is going the way of the Tower of Babel," said Louis Taylor, a real estate analyst at Deutsche Banc Securities. "The problem with FFO was that companies were arbitrarily deciding what to put in and what not to put in."

REITs are companies that own all types of properties, from Manhattan skyscrapers to California apartments and Florida mobile home parks. They are exempt from corporate income taxes if, among other things, they distribute at least 90% of net income to shareholders as a dividend.

The industry created funds from operations in 1991 as a way to show how REITs could pay out more in dividends than they earned in net income. The figure is generally defined as net income plus depreciation and before any extraordinary items. Funds from operations takes into account the noncash depreciation costs involved in owning real estate and the tendency of properties to increase in value over time.

Analysts have come to believe this attempt to be more transparent may have confused investors even more, and made it harder for the industry to be compared with others.

Starting Monday analysts will post their earnings estimates to Thomson Financial/First Call on the basis of net income before gains or losses on real estate and also in funds from operations.

Some REITs, such as AMB Property Corp. and Archstone-Smith Trust, have been ahead of the analysts. These companies started emphasizing earnings per share over funds operations in their quarterly reports.

Because funds from operations isn't an audited number, executives at these and some other companies have argued that it has been hard to compare results because of discrepancies.

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