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.
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