Considering adding REITs to your investment portfolio this year?
Navigating their balance sheets to determine their investment potential can be a maze of confusing acronyms and ratios.
Luckily, we have compiled a list of the most common terms you’ll come across, with a brief explanation for why they’re important.
Annualised passing rent
Annualised passing rent refers to the total amount of rental income received from a property over the course of a year, before deducting any expenses or allowances.
It is an important metric for REITs as it helps to measure the income-generating potential of the properties owned by the REIT.
EPRA dividend cover
EPRA dividend cover is calculated by dividing a REIT's EPRA earnings by its total dividend payments. EPRA earnings are a measure of a REIT's recurring income, excluding one-off items and fair value adjustments.
By dividing EPRA earnings by total dividend payments, investors can determine the number of times the REIT's dividend payments are covered by its recurring income.
For REIT investors, EPRA dividend cover is important because it provides an indication of the sustainability of the REIT's dividend payments.
EPRA Earnings
EPRA (European Public Real Estate Association) earnings are a widely used financial performance measure for real estate companies, particularly for REITs in Europe.
It is a measure of the underlying earnings of a company, which takes into account the recurring income generated from its real estate operations and eliminates one-off items and other non-recurring items.
EPRA EPS
EPRA (European Public Real Estate Association) earnings per share (EPS) is a variation of the traditional EPS calculation, which takes into account the recurring earnings generated by the company's real estate operations and eliminates non-recurring items and other non-cash items.
EPRA NTA
EPRA (European Public Real Estate Association) net asset value (NAV) is a variation of the traditional NAV calculation, which takes into account the fair value of the company's real estate assets and eliminates non-recurring items and other non-cash items.
It provides investors with a transparent and consistent method of evaluating a REIT's underlying net asset value and comparing it with its peers.
Direct Portfolio net initial yield
Direct portfolio net initial yield is a measure of the rental income generated by a REIT's real estate portfolio, expressed as a percentage of the market value of the assets.
A higher net initial yield indicates that a REIT is generating a greater amount of rental income from its real estate assets, relative to the market value of those assets.
Net loan-to-value (LTV)
Net loan-to-value (LTV) ratio is a measure of a REIT's debt leverage, expressed as a percentage of the market value of its real estate assets.
The net LTV ratio is calculated by dividing the total outstanding debt (net of cash) by the market value of the real estate assets. A higher net LTV ratio indicates that a REIT has a greater level of debt in relation to the market value of its real estate assets, which can increase the risk of default in the event of a downturn in the real estate market.
Net loan to value (Direct Portfolio)
Net loan to value (Direct Portfolio) is an important financial performance measure for REIT investors, as it provides insight into the level of financial risk associated with the REIT's core real estate portfolio, which is critical for evaluating the investment potential of a real estate company.
Change in fair value of investment properties is a financial performance metric that measures the change in the market value of a REIT's investment properties over a given period of time. It is a key driver of a REIT's net asset value (NAV).
A REIT with a consistently positive change in fair value of investment properties may be better positioned to generate strong returns for its investors over the long term.
Net gearing
Net gearing is a financial performance metric that measures the level of a REIT's debt in relation to its total assets.
A higher net gearing ratio indicates that the REIT has a greater level of debt in relation to its total assets, which can increase the risk of default in the event of a market downturn.
The Ongoing Charges Ratio (OCR)
The Ongoing Charges Ratio (OCR) helps to determine the overall cost effectiveness of the REIT's management team.
It includes all the costs associated with running a REIT, such as management fees, administration costs, property management fees, audit fees, legal fees, and other operational expenses.
For REIT investors, the OCR is important because it provides an indication of how efficiently the REIT's management team is operating.
Weighted Average Energy Performance Certificate (EPC)
The Weighted Average Energy Performance Certificate (EPC) rating is a metric used to measure the energy efficiency of a REIT's portfolio of properties.
A higher weighted average EPC rating indicates that the REIT's properties are more energy-efficient and may have lower operating costs, which could positively impact the REIT's financial performance and sustainability.
Weighted average unexpired lease term (WAULT)
Weighted average unexpired lease term (WAULT) is a measure of the average remaining time until the expiration of the leases in a REIT's real estate portfolio, weighted by the rent and lease term of each property.
WAULT is important for REITs because it provides investors with an indication of the stability and predictability of the company's rental income stream.
Regulatory Bodies
Association of Investment Companies (AIC)
The AIC is a trade association that represents the interests of closed-ended investment companies (CEICs) in the UK. The AIC has developed a set of standards, known as the AIC Code of Corporate Governance, that CEICs are expected to follow in order to ensure good corporate governance.
While REITs are not technically CEICs, they are often subject to similar regulatory requirements, and many REITs in the UK have chosen to follow the AIC Code as a best practice. The AIC Code covers a range of issues related to corporate governance, including board composition and effectiveness, remuneration, and shareholder communication.
many investors consider adherence to the AIC Code as a sign of a REIT's quality and professionalism, which can help attract investment and support the growth of the business.
European Public Real Estate Association (EPRA)
EPRA is a non-profit organisation that represents the interests of listed real estate companies and investors in Europe. EPRA has developed a set of performance measures and reporting standards for real estate investment trusts (REITs) that are widely used by market participants.
EPRA provides a framework for calculating key performance indicators (KPIs) for REITs, which include measures of earnings, net asset value (NAV), and total shareholder return (TSR). EPRA KPIs are intended to provide investors with a more transparent and standardized view of a REIT's financial performance, as well as a way to compare the performance of different REITs.
EPRA measures exclude certain items, such as property valuation changes and deferred taxes, that can distort a REIT's financial performance. By using EPRA measures, investors can get a better understanding of a REIT's underlying operating performance.