What it means
The letters stand for earnings before interest, taxes, depreciation, amortisation, rent and management fees. It extends EBITDAR by also adding back the fee paid to an outside manager or operator.
This allows an investor to see the earning power of the building and the business itself, before deciding how the property will be owned and run. The measure is common in sectors where the owner of a property and the operator of the business can be different companies.
Think of a care home owned by a property investor and run by a specialist operator, or a hotel owned by a fund and managed by a global brand. Each party takes a slice through rent or management fees, and EBITDARM shows the total pot before those slices are cut.
Buyers and lenders use EBITDARM to value facilities and to size loans. Property investors often look at the ratio of EBITDARM to rent, called rent cover, to see how safely the operator can pay the landlord.
A rent cover figure well above 1 suggests the operator has plenty of room, while a figure close to 1 suggests the rent is a stretch. As with other adjusted profit measures, EBITDARM is not defined by accounting standards.
Management fees can be set at different levels and by different methods, so a real comparison requires a careful look at what is being added back and whether the fee reflects a market rate. The measure also hides a trap.
Because both rent and management fees are real costs that someone has to pay, EBITDARM is always higher than the profit any single party actually keeps. Treat it as a measure of the facility's potential, not of any one party's income.
When you read a healthcare or hotel deal document, look for how the measure is labelled and whether the management fee is at a market rate. Operators who are owned by the same group as the landlord sometimes charge a fee that is set artificially, and that can make EBITDARM look different from what an independent operator would produce.
A short question about this can reveal whether the numbers are comparable.
In practice
Real-world examples.
Example
A healthcare property fund is thinking of buying a care home let to an operator. It uses EBITDARM to see how much income the building supports before rent and management fees.
Example
A hotel owner hires an international brand to manage its hotel for a fee. The owner tracks EBITDARM to see the hotel's operating performance separate from the management contract.
Example
A lender is funding the purchase of a chain of dental clinics run by a management company. It sets its loan size using a multiple of EBITDARM, then checks that rent cover is comfortable.
Formula
Calculation
EBITDARM = EBITDA + Rent expense + Management fees
Rent cover = EBITDARM / Rent expense
Worked example for a care home:
EBITDA: $900,000
Rent expense: $300,000
Management fees: $150,000
EBITDARM = $900,000 + $300,000 + $150,000 = $1,350,000
Rent cover = $1,350,000 / $300,000 = 4.5 times
The facility generates 4.5 times its rent before rent and management fees are paid.
To see the sharing of the pot, imagine the same care home. Of the $1,350,000, the landlord receives $300,000 as rent and the manager receives $150,000 as a fee, which leaves the operator with $900,000 before interest, tax and depreciation. That $900,000 is simply the EBITDA we started with, so the calculation can be run in either direction.Case study
Seen in the real world.
This case is fictional. Willowbrook Care, an invented operator, ran a care home where EBITDA was $900,000, rent was $300,000 and management fees were $150,000. The EBITDARM came to $1,350,000.
A landlord considering a new lease asked for the EBITDARM to work out rent cover, which was 4.5 times. Seeing a strong cushion, the landlord agreed to a lease with annual rent increases, while the operator was reassured that the rent would remain affordable.
The operator also used the figures to negotiate. By showing that the facility could comfortably pay its rent, it argued for a longer lease term, and the landlord agreed because a stable, well-covered tenant lowered its own risk.
Watch out
Common mistakes.
- Treating EBITDARM as income that belongs to one party. It is a pot that is later shared between the landlord, the manager and the operator.
- Ignoring whether the management fee is at a fair market level. An inflated fee distorts the measure and flatters the facility.
- Using EBITDARM to judge how much profit an operator actually keeps. The operator still pays rent and fees out of this figure.
Questions
People also ask.
What is rent cover?
It is EBITDARM divided by rent, showing how many times the facility's earnings could pay the rent.
Why do healthcare investors favour EBITDARM?
Property and operations are often owned and run by different companies, so they need a measure that sits above both.
Is EBITDARM audited?
No. It is a non-standard measure, so the company or analyst supplies the definition.
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