| REITs with the greatest momentum | |||
|---|---|---|---|
| Price ($) | Market Cap ($B) | 12 month total return (%) | |
| Byt Investment & Management Co. (AIV) | 8.57 | 1.3 | 37 |
| Service Properties Trust (SVC) | 9.13 | 1.5 | 37 |
| Tanger Factory Outlet Centers Inc. (SKT) | 21.90 | 2.3 | 35 |
| Russell 1000 | ON | ON | 6 |
| SPDR fund selected real estate sector (XLRE) | ON | ON | -10 |
Source: YCharts
- Byt Investment & Management Co.: It is a development company that focuses on the multi-family market.
- Trust Service Features: Service Properties is a REIT that invests in hotel and retail net leases with more than 200 hotels located in North America. In May, Service Properties Trust released its first quarter results. The REIT swung to a profit of $26 million after posting a loss of $120 million in the year-ago quarter. The trust sold 18 hotels in the first quarter, raising $42 million, a sevenfold increase over the previous year.
- Tanger Factory Outlet Centers Inc.: Tanger Factory Outlet operates open-air outlet malls with locations in Canada and 20 states. On April 11, Tanger Factory raised its annual dividend by 11% to $0.98. Tanger Factory Outlet released its first-quarter earnings in April, reporting a 16% rise in net profit and raising its full-year 2023 outlook for funds from operation (FFO), core FFO and net earnings per share.
Key Metrics for REIT Analysis
Investors should understand specific metrics when analyzing REITs due to their specialized structure. Two key metrics used to analyze these securities include funds from operations (FFO) and adjusted funds from operations (AFFO).
FFO: This metric measures the value of a company cash flow created through its business operations by adding and subtracting certain items from net income. Investors calculate FFO by addition amortization and amortization fees to net income after deducting gains from the sale of the property. FFO provides investors with a more accurate reflection of operating performance because investment properties typically appreciate over time, rather than depreciate like many assets.
AFFO: This measures the real estate company’s recurring/normalized FFO after deducting capital maintenance expenses. Many analysts consider AFFO to be a better measure than FFO because it takes into account the ongoing costs of managing a property over its life. Investors typically use AFFO to determine a company’s ability to pay dividends to shareholders in the future.
Practical example Calculation of FFO and AFFO
Assume that XYZ Ltd. reported net income of $1 million. It also incurred $50,000 and $100,000 in depreciation and amortization during the same reporting period. In addition, the company had a $200,000 gain on the sale of a property in its portfolio.
XYZ also reported rent of $75,000 and recurring capital expenditure (CapEx) in the amount of $100,000 it incurred in carrying out maintenance repairs on properties it owns.
Step 1: Calculate FFO.
FFO = $1,000,000 + $50,000 + $100,000 – ($200,000)
FFO = $1,150,000 – $200,000
FFO = $950,000
Step 2: Subtract recurring capital expenditures and rent from FFO.
AFFO = FFO – Capital Expenditures – Rent Adjustments
AFFO = $950,000 – $100,000 – $75,000
AFFO = $775,000
Benefits of investing in REITs
Two main benefits that REITs provide to investors liquidity and diversification. Real estate investments have a time-tested favorable risk/return profile with less volatility compared to other assets. However, real estate deals typically take weeks or months to close, making the asset class extremely illiquid. REITs solve this problem by having their securities traded on a major stock marketallowing investors to buy and sell easily.
Investing in real estate requires a significant financial commitment that often limits buyers to a specific market or type of property. Investing in REITs solves this problem by allowing investors to diversify, with many trusts holding a portfolio of different types of properties, such as apartmentsretail spaces, healthcare facilities or even telecommunications infrastructure.
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As of the writing of this article, the author does not own any of the above stocks.