EBITDAR: a Worked Example

EBITDA is a measure of earnings after occupancy has been paid for, if the occupancy happens to be rent, and before it has been paid for, if the occupancy happens to be interest and principal on a mortgage. Two identical businesses therefore report different EBITDA because of a property decision. EBITDAR takes the rent out too, so the comparison is of the trade itself: what the shop floor, the kitchen or the hotel earns before anyone is paid for the building.

That makes it useful for premises-heavy trades such as retail, hospitality, gyms and care homes, and for airlines leasing aircraft. It is a starting point rather than a measure of comfort. The rent still has to be paid, and a figure that ignores it says nothing by itself about whether the business can pay it.

The difficulty is finding the rent. IFRS 16 puts most leases on the balance sheet as a liability and a right-of-use asset, replacing the rent line with depreciation and interest, both below EBITDA. It applies in New Zealand and Australia through NZ IFRS 16 and AASB 16 for entities reporting under those standards, including reduced-disclosure reporters. A lessee may elect to keep leases of twelve months or less and low-value assets in operating costs, and rent that varies with the tenant's sales stays there because it is not part of the lease liability. So under IFRS 16, EBITDA already sits close to EBITDAR, and only what remains in costs is added back.

Other accounts differ. UK groups on FRS 102 kept most operating lease rent in costs until the 2024 amendments, which bring most leases on balance sheet for periods beginning on or after 1 January 2026, so UK files will show both bases for a while. Many smaller private companies in New Zealand and Australia prepare special-purpose accounts that may still show plain rent. A lender works out which basis it is looking at before comparing a borrower with anything.

Two furniture retailers, constructed for this page like every figure in it, each have sales of US$40m and 22 showrooms. The tenant leases every showroom at US$5.0m of rent a year. The owner holds its freeholds and has borrowed against them. Both earn EBITDAR of US$8.0m. The tenant's accounts here keep rent in operating costs.

On the headline ratios the tenant is the safer credit by a distance. On fixed charge cover it is the weaker. Its leases, worth US$25m if capitalised, make its adjusted leverage 3.5 times ((3 + 25) ÷ 8), close to the owner's 3.75, but the tenant pays US$5.7m a year for its premises and debt and the owner US$3.9m. These levels are the example's, not market norms.

If the tenant's accounts were on IFRS 16, the picture would shift without the business changing. With US$4.4m of its rent capitalised and US$0.6m of turnover rent left in costs, reported EBITDA would read US$7.4m. Only the US$0.6m gets added back to reach the same EBITDAR of US$8.0m.

Where rent is still in costs, EBITDA is struck after the landlord and before the bank; EBITDAR is struck before both. It belongs in a ratio whose other side counts the same obligations, and using it on one side only produces errors. Dividing lease-adjusted debt by plain EBITDA, or EBITDAR by debt with no leases in it, compares figures on different footings. Lease-adjusted leverage pairs EBITDAR with debt that includes the leases, and fixed charge cover pairs it with payments that include the rent.

The R has a second use. In some companies' reporting it stands for restructuring costs, which is a quite different adjustment. The label alone is not enough; the reconciliation shows which one it is.

DEFINED IN ONE PARAGRAPH → · LEASE-ADJUSTED LEVERAGE, WORKED → · FIXED CHARGE COVER →

Two things change when a lender moves to EBITDAR. The covenant set changes: a business whose largest commitment is rent is usually better tested on fixed charge cover, because interest cover and plain leverage stay quiet until the rent has already become a problem. And the reading changes from group to site. A lender wants EBITDAR by site, since a store that cannot cover its own rent keeps drawing cash from the others until its lease ends or a landlord agrees to let it go.

Documents raise a further point. A covenant set before a borrower changed its lease accounting may be frozen on the old basis, in which case the compliance certificate has to restate EBITDA and the rent to match. A lender reading a certificate needs to know which basis the definition uses, because the same word can describe two very different numbers.

HOW BANKS READ RETAILERS → · COMPLIANCE CERTIFICATE → · DEBT TO EBITDA →