[Investor Basics] Fundamental Analysis Concepts & REIT
Following two previous posts on Investor Basics – Concepts & Style and Technical Analysis Concepts, this article would look at one of the best yielding groups of stocks in the stock market – REIT, as well as some of the other terms related to Fundamental Analysis Concepts.
Real Estate Investment Trust
Real Estate Investment Trusts (REIT for short) are securities of companies that manage properties in their portfolio and distribute the profits from these properties, revenue from the rents and leases, to their unitholders.
Proper terms for REIT are slightly different from a normal stock counter.
In REIT, a stockholder is known as a unitholder, a share is known as a unit, dividends are called distributions.
As REITs are unique, profits that come from their rents or leases are to be distributed at 90%! Yes, 90% of the profits MUST be distributable. Note that this is only so for REIT!
As REIT gives constant and stable (for most of them anyway) distributions, many passive investors like REIT for their simplicity and consistency. Active Investors like REIT for their stock appreciation during key periods like during distribution periods or when there are announcement on new property acquisitions.
Personal advice for speculators in REIT is to stay away. The reasons being are while REIT many appreciate, the primary idea is to look at the distribution yield. This alone already puts an invisible resistance on the REIT counter. Another reason is that since the REIT distributes most of their profits, their cash flow is limited. So while REIT does appreciate, they will usually do so gradually and slowly, something that short-term traders must take note of.
The primary concept when one wants to own units of REIT (usually for a mid to long term), should be for the constant distribution and the distribution yield. However, there are other important figures to look out for in REITs. These figures while subjective to the eye of the beholder, gives certain insight on things that are not seen by the naked eye.
Distributions
Distributions give a constant stream of money back from your investments. While similar todividends, companies that give dividends usually have no obligation or fixed policy to do so but distributions are necessity for Trust securities.
Distributions of REITs are usually given semi-annually or quarterly. There is a list of REITs and the frequency of their distributions at the end of this article.
Distribution Yield
Distribution yield, similar to dividend yield already covered in my earlier article, is calculated by taking the total annual DPU (distribution per unit) divided by the price of the stock at the point in time the yield is to be calculated, multiply by 100%.
Example: $0.10 (total annual DPU) / $1.30 (price of stock when calculating yield) x 100% = 7.69%
What this means is that, based on the price of $1.30, the REIT returns 7.69% annually.
You can use this figure as a guide if you want to invest into this REIT. Assuming that the current stock price is now at $1.50 instead of $1.30 and assuming that the total annual distribution stays the same at $0.10, the current distribution yield is no longer 7.69% but 6.66%. Its yield has dropped by 1% and the rule of thumb is that the yield will keep dropping as the REIT stock price increases and if its annual DPU stays the same or dips.
Meaningful: Distribution yield will tell you the percentage of returns you can expect annually from the amount you intend to invest or had invested.
Passive investors should use distribution yield to calculate the optimal price they want to invest into an REIT based on the returns they want to see. Annual DPU & distribution yield are always indicated in all REITs' financial year end reports.
Net Asset Value Per Unit (NAVPU) / Net Asset Value Per Share (NAVPS)
Net Asset Value Per Unit (NAVPU) or Net Asset Value Per Share (NAVPS) if referring to a non-REIT stock, is the current value of the security per unit listed in the market. How this is calculated is by taking all of the current assets of the REIT, minus away its liabilities, divided by its units outstanding in the stock market.
To put this in layman’s term, if an REIT has to sell all its properties, cash out on all of its investments and liquidate whatever other assets it has and after paying off all its liabilities, divide the outstanding money to its unitholders, this is the value of each unit. A higher NAVPU tend to usually mean a greater "value" of the REIT.
Meaningful: NAV per unit or share will tell you how much value the unit or stock is worth in the current market.
Passive investors can use NAVPU/NAVPS to determine if a unit/stock counter is overpriced or undervalued. It is indicated on the financial report under “Net Asset Value per Unit”.
Gearing Ratio (Debt-to-Asset Ratio / Debt Ratio)
As all REITs require heavy financing for their acquisitions and operations, the gearing ratio calculated is Debt-to-Asset ratio (or commonly known as Debt ratio), where the total debts is divided by the total assets multiplied by 100%.
All REITs can have a maximum of 60% of gearing only after having their credit rating given by Fitch, Moody’s, or Standard & Poor’s. Otherwise, they can only have a maximum of 35%.
Meaningful: Debt-to-Asset Ratio will tell you how much financial leverage the REIT or company has and is currently using.
Passive investors can use Debt-to-Asset ratio to determine if the company is having too much debts or borrowing heavily (especially if the ratio is greater than 100%). Different industry and sectors have different borrowing range. Use this to compare companies within the same sector to determine which have stronger positive cash flow. Gearing ratios are usually indicated in the presentation slides or press releases.
Real Estate Investment Trust
Real Estate Investment Trusts (REIT for short) are securities of companies that manage properties in their portfolio and distribute the profits from these properties, revenue from the rents and leases, to their unitholders.
Proper terms for REIT are slightly different from a normal stock counter.
In REIT, a stockholder is known as a unitholder, a share is known as a unit, dividends are called distributions.
As REITs are unique, profits that come from their rents or leases are to be distributed at 90%! Yes, 90% of the profits MUST be distributable. Note that this is only so for REIT!
As REIT gives constant and stable (for most of them anyway) distributions, many passive investors like REIT for their simplicity and consistency. Active Investors like REIT for their stock appreciation during key periods like during distribution periods or when there are announcement on new property acquisitions.
Personal advice for speculators in REIT is to stay away. The reasons being are while REIT many appreciate, the primary idea is to look at the distribution yield. This alone already puts an invisible resistance on the REIT counter. Another reason is that since the REIT distributes most of their profits, their cash flow is limited. So while REIT does appreciate, they will usually do so gradually and slowly, something that short-term traders must take note of.
The primary concept when one wants to own units of REIT (usually for a mid to long term), should be for the constant distribution and the distribution yield. However, there are other important figures to look out for in REITs. These figures while subjective to the eye of the beholder, gives certain insight on things that are not seen by the naked eye.
Distributions
Distributions give a constant stream of money back from your investments. While similar todividends, companies that give dividends usually have no obligation or fixed policy to do so but distributions are necessity for Trust securities.
Distributions of REITs are usually given semi-annually or quarterly. There is a list of REITs and the frequency of their distributions at the end of this article.
Distribution Yield
Distribution yield, similar to dividend yield already covered in my earlier article, is calculated by taking the total annual DPU (distribution per unit) divided by the price of the stock at the point in time the yield is to be calculated, multiply by 100%.
Example: $0.10 (total annual DPU) / $1.30 (price of stock when calculating yield) x 100% = 7.69%
What this means is that, based on the price of $1.30, the REIT returns 7.69% annually.
You can use this figure as a guide if you want to invest into this REIT. Assuming that the current stock price is now at $1.50 instead of $1.30 and assuming that the total annual distribution stays the same at $0.10, the current distribution yield is no longer 7.69% but 6.66%. Its yield has dropped by 1% and the rule of thumb is that the yield will keep dropping as the REIT stock price increases and if its annual DPU stays the same or dips.
Meaningful: Distribution yield will tell you the percentage of returns you can expect annually from the amount you intend to invest or had invested.
Passive investors should use distribution yield to calculate the optimal price they want to invest into an REIT based on the returns they want to see. Annual DPU & distribution yield are always indicated in all REITs' financial year end reports.
Net Asset Value Per Unit (NAVPU) / Net Asset Value Per Share (NAVPS)
Net Asset Value Per Unit (NAVPU) or Net Asset Value Per Share (NAVPS) if referring to a non-REIT stock, is the current value of the security per unit listed in the market. How this is calculated is by taking all of the current assets of the REIT, minus away its liabilities, divided by its units outstanding in the stock market.
To put this in layman’s term, if an REIT has to sell all its properties, cash out on all of its investments and liquidate whatever other assets it has and after paying off all its liabilities, divide the outstanding money to its unitholders, this is the value of each unit. A higher NAVPU tend to usually mean a greater "value" of the REIT.
Meaningful: NAV per unit or share will tell you how much value the unit or stock is worth in the current market.
Passive investors can use NAVPU/NAVPS to determine if a unit/stock counter is overpriced or undervalued. It is indicated on the financial report under “Net Asset Value per Unit”.
Gearing Ratio (Debt-to-Asset Ratio / Debt Ratio)
As all REITs require heavy financing for their acquisitions and operations, the gearing ratio calculated is Debt-to-Asset ratio (or commonly known as Debt ratio), where the total debts is divided by the total assets multiplied by 100%.
All REITs can have a maximum of 60% of gearing only after having their credit rating given by Fitch, Moody’s, or Standard & Poor’s. Otherwise, they can only have a maximum of 35%.
Meaningful: Debt-to-Asset Ratio will tell you how much financial leverage the REIT or company has and is currently using.
Passive investors can use Debt-to-Asset ratio to determine if the company is having too much debts or borrowing heavily (especially if the ratio is greater than 100%). Different industry and sectors have different borrowing range. Use this to compare companies within the same sector to determine which have stronger positive cash flow. Gearing ratios are usually indicated in the presentation slides or press releases.
