REIT Glossary: Understanding Essential Terms Used By REITs

| August 20, 2011 | 0 Comments

invest in reits singaporeBefore you start investing in REITs, you will need to understand a few key terms:

1) Gearing Ratio

Gearing ratio tells you how much a company is lending. Like all forms of lending, the more a company borrows, the more it is vulnerable to economic downturns because the company must continue to service its debt regardless of how bad sales are, and is also more exposed to interest rate spikes. Gearing ratio is calculated by:

Gearing Ratio = Total Debt / Total Assets * 100%

2) Distributions Per Unit (DPU)

DPU simply means the dividends per unit (which is another word for share) that is distributed to shareholders. DPU for REITs in Singapore are usually distributed quarterly (3 months) or half-annually (6 months)

3) Dividend Yield

DPU is just an absolute number, and if you want to see how well a REIT is performing, you’ll need to calculate its dividend yield. This is calculated by:

Dividend Yield = Annual DPU / Current Price * 100%

4) Net Asset Value (NAV)

The NAV of a REIT determines its intrinsic value, because it tells you the market value of all its assets after deducting all its liabilities. The formula to calculate NAV is simple: NAV = Total Assets – Total Liabilities. Logically, when a REIT’s share price is below its NAV, it means that it is undervalued.

5) Funds From Operations (FFO)

FFO can be viewed as a measure of a REIT’s operating performance and is calculated by:

FFO = Net Income – Depreciation + (Gains/Losses from Property Sales)

6) Adjusted Funds From Operations (AFFO)

AFFO is a measure that shows the amount of funds/cash available for distribution. AFFO is calculated by:

AFFO = FFO – Operational Expenditure

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Category: Learn to Invest & Trade

About the Author ()

John Tan has been Vice President of BlueTrust Investments Corporation for 6 years since the mid-90’s. He has since moved on, to be a professional full-time trader.

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