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REIT Jargon Demystified: Commonly-Used Terms That REIT Investors Should Know

COE. ECP. ERP.

Most of us living in Singapore are likely to be familiar with the terms above.

However, what about DPU, NAV, and WALE?

When we invest in real estate investment trusts (REITs), we are bombarded with a whole lot of acronyms that can make our head spin. Here at The Motley Fool Singapore, we understand that new investors may find it challenging to navigate the jargon used in the REIT-world, including DPU, NAV, and WALE. So, here is a glossary of commonly-used REIT-terms, explained simply.

AUM: Assets under management

AUM shows the value of all the properties and other assets, such as cash, held by a REIT.

AEI: Asset enhancement initiative

AEI refers to the revamping of a property to enhance its value, and hence, its rental income. AEIs are commonly carried out by retail REITs to constantly refresh their malls to attract shoppers and tenants alike.

In an earlier article here, I pointed out how Singapore’s first and largest REIT, CapitaLand Mall Trust (SGX: C38U), carries out AEIs. Such methods are similar for other REITs as well. Here’s my explanation on how AEIs can be done:

“1) Converting lower-yield space into higher-yield space;

2) Reconfiguring retail units to optimise space efficiency;

3) Maximising the use of common areas, and converting mechanical and electrical areas into space to be rented out; and

4) Upgrading amenities, sprucing up the facade, and adding play and rest areas, among others.”

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 a REIT has to pay per year on its borrowings. It is usually given as the ratio of the REIT’s interest expense over its weighted average borrowings. Some REITs call this metric “all-in interest rate.”

Gearing ratio

Gearing ratio is derived by taking a REIT’s total borrowings (both short-term debt and long-term debt) and dividing it by its total assets. REITs in Singapore have a gearing ratio limit of 45% that is set by the Monetary Authority of Singapore.

Gross revenue

Gross revenue is the income that a REIT earns through rent, operation of car parks, and related activities.

DPU: Distribution per unit

DPU shows how much distribution a REIT investor would get for every unit owned. It is similar to the dividend per share for companies. The DPU is calculated by dividing a REIT’s total distribution by the total number of units in existence.

Distribution yield

Distribution yield shows how much a REIT investor receives as DPU for the REIT unit price paid. It is similar to the dividend yield for companies, and is a measure of the return on investment for a REIT.

Income support

Some REIT sponsors provide income support for properties that are not yet mature but are injected into a REIT. Since the properties might not be able to command enough rental to provide adequate rental income for the REIT, the sponsor steps in to make-up the difference between the actual rent and the ideal rental income.

REITs in Singapore’s market that have resorted to income support include Keppel REIT (SGX: K71U), OUE Commercial Real Estate Investment Trust (SGX: TS0U) and Viva Industrial Trust (SGX: T8B).

Interest cover

This ratio shows the ability of a REIT to pay the interest on its borrowings. It 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. It excludes 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

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 who 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 current unit price of a REIT and dividing it by its NAV per unit. A P/B ratio of 1 means that the REIT’s unit price is the same as 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 command higher rent than previous leases. Unfortunately, there is no one unified way to compute the rental reversion rate as different REITs have different ways to calculate this rate.

ROFR: Right-of-first-refusal

ROFR is an agreement a REIT usually has with its sponsor. With the contract, if the sponsor wishes to sell any of its properties, it has to offer the asset to the REIT first before offering it to a third-party.

Rights issue

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 invest.

Tenant retention rate

The tenant retention rate shows the “stickiness” of a REIT’s tenants. The higher the rate, the more willing a REIT’s tenants are to staying at the REIT’s properties.

WALE: Weighted average lease to expiry

This metric shows the number of years left for the leases 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.

Weighted average term to maturity

This metric reveals the average amount of time, measured in years, until a REIT’s borrowings become due.

Yield-accretive acquisition

A yield-accretive acquisition is an investment that increases a REIT’s DPU.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended units of CapitaLand Mall Trust. Motley Fool Singapore contributor Sudhan P owns units in CapitaLand Mall Trust.