Since the official opening of the listing of China's infrastructure public REITs in June 2021, different original equity holders have successively contributed a rich number of underlying assets with diversified types and geographies to the market. After the issuance of the project, the operation and management agency gradually moved from the background to the forefront, and undertook the important mission of escorting the sustainable and stable operation of the underlying assets.
According to regulatory requirements, listed products are required to publish regular reports on each quarterly, semi-annual and annual basis, and the report card of the operation of the underlying assets during the reporting period can be "listed" in a centralized manner. In addition, before the issuance of the project, the project prospectus will also disclose a large number of historical operating information and future forecasts of the underlying assets, and how to accurately understand the calculation logic, calculation caliber, trend direction and comparison method of each operating indicator is an important means for investors to screen high-quality assets and identify operation and management capabilities.
Today, let's start with the property rights infrastructure management indicators with a high degree of generality.
In February 2024, the Shenzhen Stock Exchange and the Shanghai Stock Exchange issued the Notice on Matters Concerning the Disclosure of the 2023 Annual Report of Publicly Offered Infrastructure Securities Investment Funds (hereinafter referred to as the "Annual Report Notice"), which clearly requires: "If the type of infrastructure project is industrial park, warehousing and logistics, and affordable rental housing, the fund manager shall also disclose in the annual report the average leasable area, actual rental area, occupancy rate, and effective rental unit price of each infrastructure project at the end of the reporting period and at the end of the reporting period." , the rate of rent collection and the weighted average remaining lease term. "The Notice of Annual Report further establishes and improves the information disclosure system in line with the characteristics and rules of REITs assets.
PART.01 Look at the indicators: the logic behind the numbers
According to the author's summary and understanding, after the disclosure of the 2023 annual report, the calculation standards of the operation indicators of various property rights assets have gradually become unified, and the calculation caliber has mostly referred to the following standards:
1 Occupancy rate = actual lettable area / available lettable area
The occupancy rate can most intuitively reflect the full state of the property, and is a key indicator of the quality of the operation.
Generally, the occupancy rate here refers to the average of the month-end time point data or the month-end time point data during the reporting period, where the average occupancy rate at the end of the month can better reflect the overall leasing situation during the reporting period.
The weighted average remaining lease term is the average remaining term of all contracts in execution at the end of the reporting period, taking into account the weighting of leases for different areas.
The longer the remaining term, the more sustainable the current occupancy rate level and the higher the stability of the income.
3 Bedrooms Effective Rent Unit Price = Total Rent Receivable in the Lease / Actual Rental Area / Weighted Average Total Lease Term Positive Signal
The effective rent unit price embodies the principle of "substance".
The denominator of the rental unit price is the receivable income of the entire lease, which effectively smooths the fluctuation of the rental unit price caused by the setting of different preferential policies (rent-free period, decoration period, contract rent discount or increment), matches the connotation of the "straight-line method" in accounting, better restores the income changes of the whole cycle, and makes it easier to compare across industries and projects.
4 Rent collection rate = Accumulated paid-in rent for the year as of the end of each month / Rent receivable for the year ended at the end of each month
The collection rate is a cumulative concept, and its level directly reflects the collection situation, and the decline of the collection rate may be a leading indicator of future business risks, and also directly affects the cash of investors' dividends.
The above key indicators can not only comprehensively reflect the operation of a single product, but also facilitate horizontal comparison of the same type of products, and can even be used for cross-industry industry evaluation, which can also promote fund managers and operation management institutions to improve quality and efficiency. At the same time, under the premise of true and transparent data, each operation management institution can also disclose business indicators based on its own management caliber and calculation logic for investors' reference.
PART.02 Getting to the bottom of it: The story behind the indicator
The changes in the indicators show the business performance to a certain extent, but it is also necessary to analyze the whole picture of the project operation in combination with the business essence behind it. The following questions may be helpful to readers when interpreting the indicators.
1 What does the change in the unit price of the rent mean?
In the quarterly report, the average rent is usually presented in terms of the average rent at the point in time, and when you see the average rent falling, you will subconsciously think that the tenant's leasing capacity in the market has decreased, but this may not be the case. The average rent reflects the average price at which the lease is executed, and it is affected by both new leases, quits, and trading strategies.
For example, if a park introduces a leading enterprise in order to increase its influence on the upstream and downstream of the industrial chain when it first attracts investment, and gives a large rent discount, once the tenant's lease expires and is not renewed, although the average rent of the project will rise, it may not be good for the long-term operation of the project.
Conversely, for commercial projects with a high degree of personalization of property space, the rent in the high area is usually significantly lower than that on the lower floors, so the removal of some "cold area" areas may pull down the average rent, but in fact this is a normal business practice.
2 How do you feel about the impact of the rent-free period?
The rent-free period or renovation period is a promotional method that most investment promotion teams will use, which can help the project to achieve an occupancy rate as soon as possible, create a project atmosphere, and at the same time better maintain the original price system (compared to "rent discount").
However, the arrangement of the rent-free period is a disturbance factor under the linear cash flow, and for leases with longer rent-free periods, it may also be interspersed with annual settings, which will affect the average rent and cash flow of the contract at the point in time from time to time.
Therefore, when we find that the average rent at the time point has a large fluctuation, we can choose to judge the sustainability of the income through indicators such as effective average rent, operating income, collection rate, and operating cash flow.
3 Is the longer the remaining lease period better?
While a longer remaining lease term may represent a more sustainable current income level, it doesn't mean that short-term operations can rest easy.
The remaining lease term is longer, which may mean that the proportion of major large tenants is relatively high, and this structure means that there is a certain concentration risk, and sufficient investment gap should be reserved when the tenant expires; In times of rapid industry upswing or inflation, a shorter remaining lease term may also mean a more timely window of opportunity to renew leases to jump.
Therefore, understanding the tenant structure and industry dynamics can better assist us in interpreting the connotation of the remaining lease term.
PART.03 Open your horizons: use indicator tools in more dimensions
In addition to the business indicators presented in the regular reports, we will also be exposed to many commonly used business indicators in the prospectus and various industry research reports:
Take consumer infrastructure as an example:
There are sales volume, sales efficiency (monthly sales/leased area), and rent-to-sale ratio (tenant rental income/tenant sales revenue) to measure the tenant's operation;
There are the proportion of business area to measure the lease structure, the proportion of the expiration area in each year, and the breakdown of basic indicators in the main store and different business specialty stores;
There is a return on operating net income to evaluate the return on assets (similar to NOI Yield, Cap Rate), and there is a gross profit margin and net profit margin before interest, taxes, depreciation and amortization (similar to NOI Margin) to evaluate the efficiency of operations.
Although most of these indicators are used for internal management, and there is no unified standard for the definition of caliber, with the gradual maturity of China's real estate block transaction market in recent years, the industry experience value has gradually formed a consensus range, which is also a dimension that investors can learn from when identifying the operation of projects.
Regardless of how each product defines various indicators such as net operating income, after understanding its calculation caliber and connotation, longitudinal comparison is carried out for the same index of the same product, which has a strong auxiliary identification role in understanding the operation of assets. Understanding these indicators is also a beneficial process that continues to get closer to understanding the essence of infrastructure assets.
Operational indicators are the barometer of the operation of the underlying assets and the vane of investors' investment decisions.
For fund managers and operation management institutions, continuously improving the quality of information disclosure and enhancing the truthfulness, accuracy and completeness of information disclosure is a task that must be persisted in for a long time and cannot be slackened.
With the increasing variety of underlying asset types in China's public REITs market, the information disclosure standards of relevant operational indicators will be continuously optimized and improved to match the business attributes of the underlying assets, so as to better serve the needs of investors.
Written by | Zhu Yuting
About the author: Zhu Yuting
Fund Manager of ChinaAMC Shenzhen International REIT
Since 2016, he has been engaged in the investment and management of infrastructure projects. He has worked in CapitaMalls Real Estate Management Consulting (Shanghai) Co., Ltd. Shenzhen Branch, GLP Investment (Shanghai) Co., Ltd., and Shenzhen Xinnanshan Holdings (Group) Co., Ltd. In June 2023, he joined China Asset Management Co., Ltd.