Important Terms

Here’s a comprehensive list of terms used to evaluate REITs, with explanations and examples:

1. Real Estate Investment Trust (REIT)

• A REIT is a company that owns, operates, or finances income-producing real estate, allowing investors to invest in real estate without owning physical properties.

• Example: RioCan (REI.TO), which owns and manages commercial properties across Canada.

2. Equity REIT vs. Mortgage REIT (m-REIT)

• Equity REITs: Own and operate real estate properties and earn income primarily through rent.

  • Example: RioCan (REI.TO), which manages shopping centers and commercial properties.

• Mortgage REITs (m-REITs): Finance real estate by providing loans, earning income from interest on mortgages.

  • Example: An m-REIT that provides mortgages for residential properties.

3. Funds from Operations (FFO)

• FFO adjusts net income by adding back depreciation and amortization to provide a clearer view of cash generated by core real estate operations.

• Example Calculation: For RioCan, if net income is $500 million and depreciation is $50 million, FFO = $500 million + $50 million = $550 million.

4. Adjusted Funds from Operations (AFFO)

• AFFO refines FFO by subtracting recurring capital expenditures and other adjustments to represent cash available for dividends.

• Example: If RioCan has an FFO of $550 million and maintenance costs of $30 million, AFFO = $550 million - $30 million = $520 million.

5. Net Operating Income (NOI)

• NOI measures the profitability of real estate assets by calculating income from property operations minus operating expenses (excluding financing costs).

• Example Calculation: For a property generating $10 million in rental income with $2 million in operating expenses, NOI = $10 million - $2 million = $8 million.

6. Price-to-FFO (P/FFO) Ratio

• Similar to the P/E ratio for stocks, the P/FFO ratio evaluates a REIT’s price relative to its FFO, making it useful for valuation comparisons.

• Example Calculation: If RioCan’s share price is $15.79 and FFO per share is $1.84, P/FFO = $15.79 / $1.84 ≈ 8.58.

7. Adjusted Cash Flow from Operations (ACFO)

• ACFO considers operational cash flow, including capital expenditures, to provide an accurate measure of cash available for dividends.

• Example: If RioCan’s FFO is $550 million and it spends $40 million on capital expenses, ACFO = $550 million - $40 million = $510 million.

8. Dividend Yield

• Dividend yield measures the dividend as a percentage of the share price, indicating the income return on investment.

• Example Calculation: If RioCan pays an annual dividend of $1.20 per share and the share price is $20, Dividend Yield = ($1.20 / $20) × 100% = 6%.

9. Occupancy Rate

• This metric indicates the percentage of rentable space currently occupied, reflecting income stability and management effectiveness.

• Example: RioCan reports a 95% occupancy rate in its shopping centers, showing high tenant retention.

10. Same-Property NOI

• Same-property NOI compares the NOI from properties owned over a consistent period to measure organic growth in property performance.

• Example: If RioCan’s same-property NOI was $100 million last year and rose to $105 million this year, this indicates 5% organic growth.

11. Capitalization Rate (Cap Rate)

• The Cap Rate assesses property value by dividing NOI by the property’s market value or acquisition cost. It reflects potential return on investment.

• Example Calculation: For a property with an NOI of $8 million and a market value of $100 million, Cap Rate = $8 million / $100 million = 8%.

12. Tenant Composition and Diversification

• Diversification of tenants reduces reliance on any single tenant, lowering risk in case of tenant financial issues.

• Example: RioCan limits any tenant to 5% of its portfolio, ensuring diversified tenant sources.

13. Geographic Diversification

• Geographic diversification mitigates risks associated with localized economic downturns.

• Example: RioCan’s properties are spread across Canadian cities, including Toronto, Vancouver, and Calgary, balancing performance across regions.

14. Book Value and Price-to-Book (P/B) Ratio

• The book value represents the net value of the REIT’s assets, and the P/B ratio compares market price to book value.

• Limitations: Book value may undervalue properties as real estate appreciates while book value depreciates over time.

15. Total Return

• Total return for a REIT includes both capital appreciation (share price increase) and dividend income, showing overall investment gain.

• Example: If RioCan’s share price rises by 5% over a year and dividends yield 6%, the total return would be 11% annually.

16. Leverage Ratio

• This ratio assesses the REIT’s use of debt to finance assets, indicating risk level and financial health.

• Example Calculation: If RioCan’s total debt is $4 billion and total assets are $10 billion, Leverage Ratio = $4 billion / $10 billion = 40%.

17. Interest Coverage Ratio

• Measures a REIT’s ability to pay interest on debt from its operating income, indicating financial stability.

• Example Calculation: If RioCan’s NOI is $200 million and interest expenses are $40 million, Interest Coverage Ratio = $200 million / $40 million = 5.

These terms and metrics are fundamental to REIT evaluation, helping investors assess income stability, risk exposure, growth potential, and overall financial health.