The calculation represents the average time left on a group of leases, adjusted to reflect the size or value of each individual lease. For instance, consider a portfolio with two leases: one for \$1 million with a remaining term of 5 years, and another for \$2 million with a remaining term of 10 years. A simple average would be 7.5 years. However, the calculated figure would account for the fact that the second lease contributes more significantly to the overall value, resulting in a value closer to 8.33 years (((\$1M 5) + (\$2M 10)) / \$3M)).
This metric is crucial in evaluating the risk and stability of income streams generated from leased assets. A higher number typically indicates a more stable and predictable income stream, as revenues are secured for a longer period. Conversely, a lower number may signal a need for more active management and renewal strategies. Historically, this calculation has been used in real estate investment trusts (REITs) and other investment vehicles to provide investors with a clear indication of the portfolio’s income sustainability and exposure to lease rollover risk.
