There are 6 terms to know as a REIT investor. What is Distribution Per Unit (DPU)? What does rental reversions mean? What is WALE and aggregate leverage? Most often, these terms are important in evaluating the performance and prospects of the REIT that you are investing in.
When I started out investing, I have no clue what these terms are. But overtime, I learnt what they mean, and I will share them with you. You will often find these terms in the quarterly business updates or financial results that are reported by REITs such as Frasers Logistics and Commercial Trust, Mapletree Pan Asia Commercial Trust, PARAGON REIT etc.
If you have come across these terms and they are alien to you, read more to find out what they mean below.
1. Distribution Per Unit (DPU)
Distribution per unit (DPU) is a financial metric used in real estate investment trusts (REITs) to measure the amount of income that is generated per unit of ownership. DPU is calculated by dividing the total amount of distributions made to unit holders by the total number of outstanding units.
This metric is important for investors as it provides an indication of the REIT’s ability to generate income and its potential for growth. A higher DPU indicates a higher return on investment for unit holders, making it a key factor to consider when evaluating the performance of a REIT.
2. Rental Reversions
Rental reversions refer to the process of resetting a property’s rental rate to reflect current market conditions. This typically occurs when a lease expires, and the landlord and tenant negotiate a new rental rate. Rental reversions are important for landlords to ensure they are earning a fair market rent for their property and for tenants to secure a competitive rental rate. Factors such as supply and demand, location, and property condition all play a role in determining the new rental rate during a reversion negotiation.
Positive rental reversions occur when a landlord is able to negotiate a new lease with a higher rental rate than the previous lease agreement. This is a common goal for landlords as it can lead to increased cash flow and property value. There are several factors that can contribute to positive rental reversions, such as:
- Market Conditions: A strong rental market with high demand and low supply can create opportunities for landlords to increase rental rates during lease renewals or negotiations.
- Property Upgrades: Making improvements to the property, such as renovations or adding new amenities, can justify higher rental rates and make tenants more willing to accept a rent increase.
- Tenant Stability: Having long-term, reliable tenants who pay rent on time and take good care of the property can make it easier to negotiate higher rental rates when leases come up for renewal.
Overall, positive rental reversions are a positive sign for landlords and indicate that their property is in demand and performing well in the market.
When a property experiences negative rental reversions, it means that the rental income generated from the property has decreased over a certain period of time. This could be due to various reasons such as changes in market conditions, increased competition, or poor management of the property.
For landlords, negative rental reversions can have a significant impact on their cash flow and overall returns on investment. It may lead to lower profitability, decreased property value, and difficulty in attracting new tenants or retaining existing ones.
Therefore, it is important for landlords to closely monitor their rental income and expenses, stay informed about market trends, and make strategic decisions to address negative rental reversions before they have a long-term detrimental effect on their property investments.
3. Weighted Average Lease Expiry (WALE)
Weighted Average Lease Expiry (WALE) is a metric used in the real estate industry to measure the average time remaining on a portfolio of leases, weighted by the rentable area of each lease. It is calculated by multiplying the lease term of each individual lease by the area it covers, then summing these values and dividing by the total rentable area of the portfolio. This provides a more accurate representation of the lease expiry profile of a property or portfolio.
WALE is an important metric for investors and landlords as it helps to assess the risk associated with lease expirations and provides insight into the stability and income-generating potential of a property. A longer WALE typically indicates a more stable income stream, while a shorter WALE may signal higher risk due to potential vacancies or lease renegotiations in the near future.
4. Aggregate Leverage (Gearing Ratio)
Aggregate leverage, also known as gearing ratio, refers to the ratio of a real estate investment trust’s (REIT) debt to its total assets. Gearing ratio is calculated by dividing a REIT’s total debt by its total assets and is used to measure the level of leverage a REIT has.
Gearing is commonly used by REITs to amplify returns on equity investments, as borrowing allows them to acquire more properties than they could with just equity capital.
However, high levels of gearing can also increase the risks for REITs. In times of economic downturn or rising interest rates, heavily geared REITs may struggle to service their debt payments, leading to potential financial distress.
REITs typically have specific guidelines on permissible levels of gearing set by regulatory bodies. These guidelines aim to strike a balance between maximizing returns for investors and managing the risks associated with high levels of debt.
Singapore Real Estate Investment Trusts (REITs) are required to adhere to certain gearing limits set by the Monetary Authority of Singapore (MAS).
The MAS has set the gearing limit for Singapore REITs at 45%. This means that REITs cannot have a gearing ratio exceeding 45% of their total assets. This limit is in place to ensure that REITs maintain a healthy balance between debt and equity, reducing the risk of financial instability.
Investors in REITs should carefully consider the gearing levels of a REIT before investing, as it can have a significant impact on the REIT’s performance and stability.
5. Weighted Average Debt Maturity
Weighted average debt maturity is a financial metric that calculates the average time it will take for a company to repay its outstanding debts. It takes into consideration the amount of each debt and the time left until it matures. By using a weighted average, companies can get a better understanding of their debt obligations and plan their repayment strategy accordingly. This metric is important for investors and creditors as it gives them insight into the risk associated with a company’s debt structure.
A longer weighted average debt maturity implies lower refinancing risk, while a shorter maturity may indicate higher risk due to the need for more frequent debt repayments.
6. Dividend Yield
Dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its stock price. It is calculated by dividing the annual dividend per share by the stock price.
A higher dividend yield indicates that a company is paying out a larger percentage of its earnings to shareholders in the form of dividends. Investors often use dividend yield as a way to evaluate the attractiveness of a stock for income generation.
However, it is important to consider other factors such as the company’s financial health and growth prospects when making investment decisions based on dividend yield.
If you have other essential terms to know as a REIT investor, share them in the comments below!