Investing in real estate investment trusts (REITs) can be a whole new ball game with all the various jargon that one needs to understand.
Terms such as AEI, NLA, and WALE may seem foreign to new investors.
But fret not, we are here to help to make sense of the different REIT jargon with this one-stop glossary.
Good, or good?
Let’s dive right in!
Commonly-Used Terms That REIT Investors Must Know
An accretive acquisition is a property purchase by a REIT which increases its distribution per unit (DPU), net asset value (NAV) and/or distribution yield.
The opposite of this is a dilutive acquisition.
AEI: Asset enhancement initiative
AEI refers to the revamping of a property to enhance its value, and hence, its rental income.
They are commonly carried out by retail REITs to constantly refresh the malls to attract shoppers and tenants alike.
AEIs can be done by:
1) Reconfiguring retail units (for shopping mall REITs) to optimise space efficiency
3) Maximising the use of common areas, and converting unused space to be rented out
4) Upgrading amenities, sprucing up the facade, and adding rest areas
One of the strategies for CapitaLand Mall Trust (which has now merged with CapitaLand Commercial Trust to become CapitaLand Integrated Commercial Trust (SGX: C38U)) was to grow via improving the attractiveness of its malls.
AUM: Assets under management
AUM shows the value of all the properties held by a REIT.
For example, Keppel REIT (SGX: K71U) had S$8.4 billion in AUM at the end of September 2020, which had grown from over S$600 million in 2006.
Capitalisation rate (or cap rate)
Capitalisation rate is the net property income of an asset divided by its property value.
It measures the return on investment of a property.
Cost of debt
This metric shows much interest the REIT has to pay per year based on its borrowings.
It is usually a ratio of interest expense over the weighted average borrowings.
Some REITs call this metric “all-in interest rate”.
For instance, CapitaLand Integrated Commercial Trust’s average cost of debt, as of 30 September 2020, was 2.7%.
Gearing ratio is derived by taking a REIT’s total borrowings (both short-term and long-term) and dividing it by its total assets. Gearing ratio can be also known as “aggregate leverage”.
REITs in Singapore had a gearing ratio limit of 45%, as mandated by the Monetary Authority of Singapore. But this has been raised to 50% in light of the COVID-19 pandemic.
Gross revenue is the income that a REIT earns through rent, operation of car parks, and so on.
DPU: Distribution per unit
DPU shows how much distribution a REIT investor would get for every unit owned.
It is similar to dividend per share for companies.
DPU is calculated by dividing a REIT’s total distribution by the total number of units in issue.
Distribution yield shows how much a REIT investor receives as DPU for the REIT unit price paid.
It is similar to dividend yield for companies and is a measure of return on investment for investors.
Some REIT sponsors provide income support for assets that are not yet mature but are still sold to the REIT.
Since those properties might not be able to command enough rental to provide decent DPU for investors, the sponsor steps in to provide the difference between the market rent and the ideal rental income.
The latest example of a REIT with income support (or top-up in this case) is United Hampshire US REIT (SGX: ODBU).
US$6.5 million from United Hampshire US REIT’s IPO proceeds is used to provide income support to three properties:
- St. Lucie West Expansion (undergoing asset enhancement works which will be completed by 2021 first-quarter)
- Elizabeth Self-Storage (only completed in January 2020)
- Perth Amboy Self-Storage (only completed in 2020 second-quarter)
REIT investors have to be wary of such income support as the distribution yield will drop if the properties have not yet reached a mature level before the support ends.
This ratio shows the ability of a REIT to pay interests on its borrowings.
Interest cover is calculated by taking the net property income and dividing it by the interest expense.
NAV: Net asset value
NAV is a REIT’s total assets minus its total liabilities.
To go a step further, NAV per unit is the REIT’s NAV divided by the total number of units in issue.
NAV is also known as book value.
NLA: Net lettable area
Generally, the NLA of a property refers to the floor area that can be occupied by a tenant, excluding common areas such as lift lobbies, toilets, and corridors.
NPI: Net property income
When we deduct property-related expenses such as property management fees from a REIT’s gross revenue, we get its NPI.
Occupancy rate is the ratio of a REIT’s rented space to the total amount of available space.
Some REITs mention the term “committed occupancy rate”. This rate includes tenants who have committed to the property by signing certain agreements or paying a rental deposit but have yet to move into the building.
P/B ratio: Price-to-book ratio
The P/B ratio is a valuation metric that is derived by taking the REIT’s NAV per unit and dividing it by the current unit price.
A P/B ratio of 1 means that the REIT is selling at its NAV per unit, which is essentially the value of the REIT’s underlying assets.
Rental reversion rate
This metric shows whether new leases that were signed have higher or lower rental rates than before.
A positive rental reversion rate means that new leases signed were higher than previous leases.
Unfortunately, different REITs have different ways to calculate this rate, even within the same sector.
RevPAR or RevPAU
Revenue Per Available Room (RevPAR) or Revenue Per Available Unit (RevPAU) is mainly used for hospitality REITs to show the average amount of revenue a hotel makes per room.
This metric reveals a hotel’s performance and can be compared with other hotels in the same range.
RevPAR is calculated by multiplying a hotel’s average daily room rate (average room rental per day) by its occupancy rate.
Just like bank borrowings, rights issue is a financing method for REITs to raise funds through the sale of new units to existing unitholders.
The new units are usually given at a discount to the REIT’s market price to entice unitholders to buy the units.
A REIT’s sponsor usually offers a ROFR of its properties to the REIT it’s sponsoring.
This means that the sponsor will offer properties to the REIT first before offering them to any third-party companies.
Tenant retention rate
The tenant retention rate shows the “stickiness” of tenants to a REIT.
The higher the rate, the longer the tenants are staying at the REIT’s properties.
Weighted average debt maturity
This metric reveals the average amount of time, measured in years, until the REIT’s borrowings are due.
WALE: Weighted average lease to expiry
This metric shows the number of years left for the rental of the REIT’s tenants to expire.
WALE is measured by taking the remaining lease period of all tenants, weighted with either their occupied area or gross rental income.
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Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock. The writer may have a vested interest in the companies mentioned.