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Rent coverage compares a site's earnings before rent with its rent obligation under a stated convention. Calculate EBITDAR coverage for two US locations, check the combined result, and test a renewal increase.
Rent coverage ratio measures how many times a site's stated pre-rent earnings cover its rent obligation. Under the EBITDAR convention used here, divide earnings before interest, taxes, depreciation, amortization and rent by contractual rent for the same period. The result is an operating headroom measure, so keep the site boundary, earnings adjustments and rent basis visible.
Rent coverage ratio = Site EBITDAR / Contractual rent
Site EBITDAR = Site EBIT + Depreciation and amortization + Rent expense already deducted from EBIT
This restores rent to the earnings amount before comparing it with the obligation. It also removes depreciation and amortization, so EBITDAR is an earnings proxy rather than a complete statement of available cash.
The convention appears in company reporting. Sabra's reporting definitions define EBITDAR coverage using EBITDAR divided by contractual rent and distinguish it from EBITDARM, which also removes management fees. Omega's supplemental definitions describe annualized EBITDAR divided by annualized cash rent, alongside a separate capital-expenditure-adjusted coverage measure.
These are examples of disclosed conventions, not a universal accounting rule for every business. An internal site review should say whether management fees, central allocations, unusual costs and maintenance capital spending remain in its earnings base. Preserve that definition when comparing sites and periods.
The broader fixed charge coverage ratio can include interest and principal alongside rent. Keep that question separate from a location's rent coverage.
Use a location P&L or ledger export and a lease schedule covering the same months. Retain account and site identifiers so each summarized amount can be traced back to its source.
| File field | Why it is needed |
|---|---|
| Site and reporting period | Keeps one location's earnings with its own rent |
| Net revenue | Starts the operating earnings bridge |
| Operating costs by account | Separates rent, depreciation and amortization from other costs |
| Central cost allocations | Shows whether shared operating costs are included consistently |
| Rent expense and contractual cash rent | Reconciles recognized expense with the selected obligation basis |
| Lease dates and changes | Distinguishes historical coverage from a renewal scenario |
Base rent may differ from the cash paid because of incentives, payment timing or expense recognition. Common-area charges, property taxes and insurance also need a clear treatment. If they remain in operating costs, describe the result as base-rent coverage after those other occupancy costs. A wider occupancy ratio needs its own matched numerator and denominator.
A US business reviews its Columbus and Dayton locations for a full year. Other operating costs include site payroll, utilities, supplies, management fees and the company's consistent central cost allocations. Rent expense equals contractual rent during this example's base year.
| Annual P&L input | Columbus (USD) | Dayton (USD) | Total (USD) |
|---|---|---|---|
| Net revenue | 4,200,000 | 3,000,000 | 7,200,000 |
| Operating costs excluding rent, depreciation and amortization | 3,100,000 | 2,400,000 | 5,500,000 |
| Rent expense and contractual rent | 400,000 | 300,000 | 700,000 |
| Depreciation and amortization | 150,000 | 100,000 | 250,000 |
| EBIT | 550,000 | 200,000 | 750,000 |
EBIT is revenue less the three expense rows. For Columbus, $4,200,000 - $3,100,000 - $400,000 - $150,000 = $550,000. Dayton follows the same bridge: $3,000,000 - $2,400,000 - $300,000 - $100,000 = $200,000.
| Coverage step | Columbus | Dayton | Combined |
|---|---|---|---|
| EBIT (USD) | 550,000 | 200,000 | 750,000 |
| Add depreciation and amortization (USD) | 150,000 | 100,000 | 250,000 |
| Add rent expense (USD) | 400,000 | 300,000 | 700,000 |
| EBITDAR (USD) | 1,100,000 | 600,000 | 1,700,000 |
| Contractual rent (USD) | 400,000 | 300,000 | 700,000 |
| Rent coverage (times) | 2.75 | 2.00 | 2.43 |
| EBITDAR after rent (USD) | 700,000 | 300,000 | 1,000,000 |
Coverage is rounded to two decimals. The combined figure is $1,700,000 / $700,000 = 2.43 times. It is not the simple average of 2.75 and 2.00, which is 2.375 times before rounding.
The after-rent remainder is before interest, taxes, capital spending and working capital movements. It is useful for comparing site economics, but it is not cash the company can automatically distribute or use to fund another location.
The earnings bridge must agree with revenue less operating costs excluding rent, depreciation and amortization. For Columbus, that is $4,200,000 - $3,100,000 = $1,100,000. For Dayton, it is $3,000,000 - $2,400,000 = $600,000.
The combined figure has the same proof: $7,200,000 - $5,500,000 = $1,700,000. Separately, adding the location EBITDAR amounts and rent amounts must produce the combined numerator and denominator. Tie those totals to the approved location P&Ls and lease schedule before accepting the ratio.
For a second reconciliation, subtract rent from EBITDAR. The remainder must equal EBIT plus depreciation and amortization. Columbus gives $700,000 either way, Dayton gives $300,000, and the combined remainder is $1,000,000. This catches rent that was left in operating costs or added back twice.
Now change Dayton's annual contractual rent from $300,000 to $360,000. Hold revenue, other operating costs, depreciation and amortization constant. This is a renewal sensitivity, not a forecast of what the landlord or the business will agree to.
| Dayton calculation | Base year | Renewal scenario |
|---|---|---|
| EBITDAR (USD) | 600,000 | 600,000 |
| Rent expense and contractual rent (USD) | 300,000 | 360,000 |
| EBIT (USD) | 200,000 | 140,000 |
| Rent coverage (times) | 2.00 | 1.67 |
| EBITDAR after rent (USD) | 300,000 | 240,000 |
The $60,000 rent increase lowers EBIT by $60,000 but leaves EBITDAR unchanged because rent is added back. The denominator rises, taking coverage to $600,000 / $360,000 = 1.67 times, rounded to two decimals.
If management's illustrative internal target is 2.00 times, required EBITDAR becomes 2.00 × $360,000 = $720,000. The gap is $720,000 - $600,000 = $120,000. That is the operating improvement to investigate before assuming the site can retain its prior buffer. For the broader earnings measure around interest expense, see cash coverage ratio.
Upload your location P&Ls and rent schedule with the earnings convention your team uses. Covirage maps the columns, and its tools compute and check site coverage and the combined totals; the external AI model explains the result with every figure traced to its rows. Create a free Covirage account in about a minute, then set up your business and bring a sample of your own data.
See cost variance analysis for the wider cost review.
Use the company's documented target and the definition applicable to the site. The required buffer depends on earnings volatility, investment needs and other obligations. A ratio above one only means the stated earnings numerator exceeds the rent included in that calculation.
That is a common convention, but the definition should always be supplied. Some reviews use another pre-rent earnings measure or deduct maintenance capital spending. Others add back management fees. Those choices change the result even when the site's underlying operations are unchanged.
Include them only under an explicitly defined broader occupancy measure. Base rent coverage and total occupancy coverage answer different questions. If those charges remain operating expenses in the numerator, do not add them to the denominator without also making a consistent numerator adjustment.
For a portfolio total, divide total eligible pre-rent earnings by total matching rent. A simple average of site ratios gives small sites the same weight as large sites. Keep site-level results visible so a strong location does not hide a weak one.