Sep 10, 2013

Cory Diary : Simple Parameters of a Reit


Simple Parameters of a Reit

With tapering, i am kind of confuse how large an impact it is. Here's a simple draft note i am working on.

$1M Fund on a 1M Shares priced at par.
Leverage : 40% to $1.4M total funding
Earning Yield : 10% of $1.4M = $140,000

Cost of Loan : 3% implied = $12,000
Earning less Loan Cost = $128,000
Dividend Yield @95% = $115,200 implied 11.52%

What-if Cost of Loan 5% ?
Cost of Loan : 5% implied = $20,000
Earning less Loan Cost = $120,000
Dividend Yield @95% = $114,000 implied 11.4%

For 2% loan cost increase, a lower Yield of 11.4% will be $0.9896. Even with no increase in rent, did Market over-react to the rate hike ?

What-if we start with 5% Earning Yield and 3% Loan cost ?
Earning Yield : 5% of $1.4M = $70,000
Cost of Loan : 3% implied = $12,000
Earning less Loan Cost = $58,000
Dividend Yield @95% = $55,100 implied 5.51%

What-if we start with 5% Earning Yield and 5% Loan cost ?
Earning Yield : 5% of $1.4M = $70,000
Cost of Loan : 5% implied = $20,000
Earning less Loan Cost = $50,000
Dividend Yield @95% = $47,500 implied 4.75%

Conclusion

Put it plainly, an investor will suffer a greater percentage loss for a lower yield counter.

Dividends
Yields
Result
1
 $       10,000
11.52%
2
 $         9,896
11.40%
-1.0%
from item 1
Dividends
Yields
Result
3
 $         4,783
5.51%
4
 $         4,123
4.75%
-13.8%
from item 3

This is not saying having a Strong Sponsor, Book Value, Sector, Growth, Management and Gearing are not important.


Cory
10th Sept'13

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