| REITs Have Too Much Momentum | |||
|---|---|---|---|
| Price ($) | Market capitalization ($B) | 12 Month Total Return (%) | |
| Peakstone Realty Trust (PKST) | 20.05 | 0.7 | 187 |
| Opinions of the company Apartment Investment & Management Co. (AIV) | 8.56 | 1.3 | 57 |
| Service Properties Trust (SVC) | 8.10 | 1.3 | 45 |
| Russell 1000 | AFTER | AFTER | 3 |
| Real Estate Select Sector SPDR (XLRE) | AFTER | AFTER | -13 |
Source: YCharts
- Opinions of the company Peakstone Realty Trust: This is a REIT that owns single-family industrial properties. The company’s IPO date was April 13, which could lead to higher returns compared to similar REITs. Peakstone’s net income for the first quarter was 30 times higher than a year earlier, thanks in part to higher sales of $169.6 million.
- Opinions of the company Apartment Investment & Management Co.: This is a product company that targets a multi-brand market.
- The company’s opinion Service Properties Trust: Service Properties is a REIT that sells hotels and leases, with more than 200 hotels located within North America.
Key Metrics for evaluating REITs
Investors need to understand specific metrics when analyzing REITs because of the unique structure of REITs. Two key metrics used to analyze these securities include net income from operations (FFO) and adjusted net income from operations (AFFO).
FFO: This metric measures the amount of cash a company generates through its business activities by adding and subtracting other items from total cash. Marketers calculate FFO by adding up cost and net income to get net income while subtracting profit from selling assets. FFO gives investors a more accurate picture of their performance, as real estate investments appreciate, rather than depreciate like most assets, in value over time.
AFFO: This measures the restatement/adjustment of a company’s FFO after deducting operating expenses. Many experts consider AFFO to be a more efficient method than FFO because it considers the cash flows from managing the property over its lifetime. Investors often use AFFO to determine a company’s ability to pay dividends to shareholders in the future.
A Useful Example for Calculating FFO and AFFO
Suppose that XYZ Ltd. he raised $1 million. It also incurred $50,000 and $100,000 in depreciation and amortization during the same period. In addition, the company had a profit of $ 200,000 from the sale of goods in its portfolio.
XYZ reported rent of $75,000 and capital expenditures (CapEx) of $100,000, which it incurred in renovating the property it owns.
Step 1: Calculate the FFO value.
FFO = $1,000,000 + $50,000 + $100,000 – ($200,000)
FFO = $1,150,000 – $200,000
FFO = $950,000
Step 2: Subtract recurring expenses and rent from FFO.
AFFO = FFO – Capital Expenditures – Rent Adjustments
AFFO = $950,000 – $100,000 – $75,000
AFFO = $775,000
Advantages of Investing in REITs
The two main benefits that REITs offer investors are related to income and diversification. Real estate has a proven long-term track record of low volatility compared to other assets. However, the closing of real estate transactions takes weeks or months, making the financial community untenable. REITs solve this problem by selling their shares on the capital markets, allowing investors to buy and sell easily.
Selling real estate requires a significant financial commitment, often limiting buyers to a particular market or type of property. Investing in REITs solves this problem by allowing investors to diversify, as most REITs hold different types of assets, such as condos, real estate, hospitals, or even telecommunications networks.
