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Sunday, October 21, 2007

Reading a REIT statement

By New Straits Times

Just bought yourself some shares in a Real Estate Investment Trust or REIT? Congratulations on taking that first step into what promises to be a rewarding world.

Now comes stage two: How to read a REIT financial statement.

Sometimes an onerous task, especially when it is accompanied by a thick report, you can stay on top if you keep an eye on some key metrics which will give you an inkling of future prospects.

Gross revenues

This is the first item in a REIT statement.

An aggregate of the total income flowing into your trust, it comprises the rental income received by the investment properties as well as car-park fees and income derived from additional charges levied on tenants.

Compare this amount with the previous corresponding period to see just how your REIT has performed. Since most of them in the country are in a sharp growth mode, huge jumps in revenue should come as no surprise.

Property expenses

Here, all the expenses incurred to manage the properties are totalled, and include assessments, utilities charges, service contracts, maintenance and security costs as well as property management fees.

Deducting this item from the gross revenue provides the nett rental income received from the properties in your REIT.

Do a mental calculation to give an estimate of the growth in rental income, and to see if they are in line with general trends.

Manager's fees

This is the second biggest expense in the REIT statement.

Paid to the REIT manager, it is generally made up of four components: Basic fee; performance fee benchmarked against an index; acquisition fee; and disposal fee.

The latter two are a percentage of the value of the properties acquired or disposed of during the period.

Expect this amount to be on an uptrend for active REITs.


Found in the balance sheet under liabilities, there is a prescribed limit as to how much REITs can borrow to fund their property purchases.

Under Malaysian guidelines, it should not be more than 50 per cent of the vaue of all assets. For REITs that are way below this level, it mean that their managements are taking a conservative approach and therefore, may not be optimising opportunities.

Too close to the 50 per cent mark, however, could mean that further growth is limited unless more units are issued.

Net asset value (NAV) per unit

The NAV has special significance as it is indicates the income-generating power of a REIT.

Also found in the balance sheet, it is determined by deducting all the liabilities from total assets.

The stock price of your REIT should be more or less in line with the NAV per unit, and any large variation of say 20 per cent or more should cause alarm bells to sound.

If it is higher, then the market could be perceiving that something positive is brewing and is thus pricing it ahead, which warrants investigation.

On the flipside, if it is lower, your REIT could either have been overlooked or has fallen out of favour with investors.

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