EBITDA + R

[Laxputs]

Does it make sense to value companies with significant rent/lease expenses with EBITDA + R? The reason being an owner of the business can decide her own capital structure and the Rent is not a necessary expense?

 

TIA

[Andy Dufresne]

I'm not sure that I am following your train of thought - from what I know EBITDAR is usually used to make apples-to-apples comparisons of companies that have significant rent expenses as part of their operations, e.g. restaurants; so, by definition, rent is a necessary expense...

 

With respect to the capital structure issue, when you make comparisons you might actually need to estimate rent expenses or sale/lease-back options when trying to figure out the restaurant's returns separated from the real estate. Look up Sandell's write-up of Bob Evans Farms where they suggest (if memory serves), that when you do this calculation, BOBE's abysmal performance is actually worse ... they are now pressuring BOBE to sell and lease back the restaurants and thus create a rent expense :)

[Laxputs]

Thanks. Does one capitalize the lease obligations at 8x when calculating EV and then add back the lease payments for the year to EBITDA?

[Andy Dufresne]

I don't know where you get the x8 figure but in general both GAAP and IFRS require a company to show all of its off BS lease obligations; I simply then add them as part of the company's debt to the EV calculation (together with underfunded pension liabilities, etc.)

[Laxputs]

Thanks. 

 

Taking HA for example and using this recent 10-Q, what do you say EV is:

 

Here is a link:  http://investor.hawaiianairlines.com/phoenix.zhtml?c=82818&p=irol-SECText&TEXT=aHR0cDovL2FwaS50ZW5rd2l6YXJkLmNvbS9maWxpbmcueG1sP2lwYWdlPTk3MTMwNDcmRFNFUT0wJlNFUT0wJlNRREVTQz1TRUNUSU9OX0VOVElSRSZzdWJzaWQ9NTc%3d

 

Pg 38 breaks down debt and capital lease obligations

 

Debt and capital lease obligations = 1372

MCAP = 13.4 x 62.9 = 843

Cash + short term investments = 564

EV = 1651

 

Or do we include " Operating leases--aircraft and related equipment" as well = 641

 

EV = 2292

 

TIA

[tooskinneejs]

It does not make sense to value companies with significant operating lease expenses using EBITDAR because by doing so, you are pretending that the cost of the leased item that directly contributes to the operating results of the entity (and is unavoidable) doesn't exist.  For example, without their mall-based operating leases, stores like American Eagle wouldn't have the sales they have.  So you can't ignore that cost anymore than you can ignore other costs essential to the sale, such as the cost of the actual clothes.

 

And to Andy's point about the measure being used to compare two entities with significant rent expenses, I would say that also doesn't make sense for the exact same reason above and also because by doing so you may be ignoring a benefit that one entity has over the other in the form of better lease terms.  Two entities, both of which have significant rent expenses, will be worth totally different amounts to their owners if one has better average lease rates (with all other factors, such as sales, cogs, etc., being equal).

 

In my experience, it is usually companies with poor underlying economics that hope investors will pay more attention to measures such as "profits before expenses" than to the real bottom line including all expenses.

[Laxputs]

Interesting. Thanks for the reply. What do you think is a good metric to compare airline companies that lease airplanes?

[tooskinneejs]

Operating income and net income.  Also, operating cash flow.