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Terms Explanation of the term
1. LTV This is an abbreviation for Loan to Value, and means the ratio obtained by dividing the amount of liabilities such as corporate bonds and loans by value of the underlying target assets. Along with debt service coverage ratio (DSCR), the ratio is a measure of the degree of safety for repayment of loans. If the target asset is real estate, the appraised value is often considered to be its asset value.
It can be said that the smaller the value is, the higher the safety against redemption of principal of the liability is. This indicator is deemed important as a so-called assessment rate of collateral when financial institutions make loans, and also valued when investors make debt investments including ABS. In addition, rating agencies set numerical criteria for LTV and DSCR corresponding to rating levels, so the indicator forms the basis of assessment.
2. NAV This is an abbreviation for Net Asset Value, and means value of net assets. In real estate investment trusts (including real estate investment corporations), NAV represents the amount after deduction of liabilities, such as borrowings, from the appraisal value of real estate, etc. included in funds. The investment unit price at the time can be assessed by comparing NAV per investment unit, which is derived by dividing NAV by the number of investment units, with the investment unit price.
3. NOI This is an abbreviation for Net Operating Income and means the net amount of operating revenue.
This is a concept of revenue with focus placed on the real estate rental business, and represents the amount obtained by deducting expenses for management and operation (such as property tax and repair expense) from total rent income.
This is employed as revenue in the calculation of net present value (NPV) and internal rate of return (IRR), which are used as indicators for investment decisions.
4. Debt and Equity These are categories for ways of financing. Debt means funds that have been raised through borrowings, corporate bonds and other means and involve a repayment obligation. Equity means funds that have been raised through shares and other means and do not involve any repayment obligation.
 If funds are raised in the both forms of debt and equity in one scheme with regard to real estate securitization, priority is given to debt investors in repayment using income from real estate, and the remaining portion of the income is distributed to equity investors. For debt, while the maturity, distribution and other conditions are clear, returns are relatively low. For equity, risks are high because the maturity, distribution and other conditions are uncertain, and instead a high return may be generated.
5. Due Diligence In real estate transactions, this term represents in-depth research that is commissioned to attorneys, accountants, architects, real estate appraisers, consultants and others on the state of land and buildings, environment, matters related to legal rights, markets, actual conditions of rental property management and others. In securitization of real estate, this research is utilized to judge profitability of investments, investment value and other matters.
6. Conduit status Conduit status is a mechanism to avoid corporate taxation to avoid double taxation with taxation on dividends or others. In securitization, since distributing income from real estate directly to investors is important, this mechanism is used as a system where the income can be appropriated to distribution to equity investors without corporation tax imposed on profits of vehicles. Vehicles of this nature are referred to as conduits.
 Specifically, there are two methods: (1) use originally non-taxable vehicles such as trusts and partnerships, (2) use vehicles that are allowed to deduct distribution of profits, etc. in determining taxable income if certain distribution rules (conduit requirements) are satisfied, such as TMK and investment corporations.
7. Ex-dividend This means that a loss of rights to receive dividends results in adjustment of the portion distributed and the lower share price. Since shareholders as of the record date for distribution of profits stipulated in the Articles of Incorporation are entitled to such dividends, a difference in the selling price arises by the dividends before and after the record date (date of right allotment). Securities exchanges make a practice of starting to conduct trades as ex-rights three days before the date of right allotment.
8. Dividend yield This is one of measures of shares, etc. and one of indicators showing the ratio of annual dividends to the share price.
Dividend yield (distribution yield) of exchange-traded real estate investment trusts (including real estate investment corporations) is calculated by the formula of distribution per unit (annualized)/investment unit price. Because distribution per unit for real estate investment trusts is affected by income from real estate itself as well as loan to value (LTV) and dividend policy, and investment unit price reflects assessment including scarcity in markets and expectations for an increase in the price, variability also occurs in dividend yield.
9. Refinance This term generally refers to re-procurement of funds. It means that on the premise of existence and continuation of companies, businesses and others, funds are newly raised to secure resources for redemption and repayment of principal and for cancellation of treasury shares, etc. when a change is needed in the existing fundraising methods (such as bonds, loans, etc. that become due for redemption or repayment, and cancellation of own shares).
In the real estate securitization scheme, there are the case where the scheme ends with sale of the target asset as the exit strategy, and the case where the securitization of real estate is continued through refinancing.
10. Leverage effect This term means the effect of increasing a yield on equity capital by raising funds for acquisition of investment assets by a combination of equity capital and borrowings, compared with the case where such funds are fully raised with equity capital.
For example, if an investment is made in a profitable property of 5,000 million yen with the investors’ funds of 2,500 million yen and a borrowing of 2,500 million yen, on the assumption of the yield of the property at 5%, revenue of 250 million yen can be earned. Assuming that the interest rate on the borrowing is 4%, revenue is 150 million yen after 100 million yen of interest expenses in this case is deducted. When this is appropriated to distribution on the investors’ funds of 2,500 million yen, the yield is 6%, so the yield for the investors is 1% higher than the yield for the property.
11. Guest room occupancy rate The “guest room occupancy rate” is the numerical value derived by the following calculation formula:
Guest room occupancy rate = number of guest rooms sold/number of guest rooms available
12. ADR “ADR” refers to the average unit price of guest rooms (Average Daily Rate) and represents the value obtained by dividing the total revenue (excluding sales of foods and beverages, other sales, fees for services, etc.) in a certain period of time by the total number of guest rooms available (total number of guest rooms occupied) in the same period.
13. RevPAR “RevPAR” refers to the total guest room revenue per day for each available guest room (Revenue Per Available Room), represents the value obtained by dividing the total guest room revenue (excluding sales of foods and beverages, other sales, fees for services, etc.) in a certain period of time by the total number of guest rooms available in the same period, and is equal to the numerical value calculated as a product of ADR and the guest room occupancy rate.
  • Source of 1 to 10: Transcribed from “Real-Estate Securitization Handbook 2018” of The Association for Real Estate Securitization.