Just started a job in business or property journalism? Or maybe you are one of those rare young people who can afford to become a landlord? Either way, if you have no idea what terms like yield and rent cover mean, this is the guide for you…
Yield = rental income ÷ property cost
Higher yields normally mean happier buyers because it indicates they have bought a property/a portfolio of properties for a low price given its value.
Conversely, lower yields mean happier sellers because it indicates the buyers have paid a high price given the property’s value.
Owner A buys Asset X for £1 million. The rent owner A gets from it is £100,000 annually – this means the yield is 10% (see below equation).
100,000 ÷ 1,000,000 = 0.1 or 10%
Now, say Owner A sells Asset X five years later to Owner B for £2 million, but assume the asset is still exactly the same and rent is still £100,000 annually, the yield goes down to 5% (see below equation). So you see the lower yield number signifies a great deal for Owner A, who has sold something at double the value it has invested into it.
100,000 ÷ 2,000,000 = 0.05 or 5%
Rent cover = ebitdar ÷ rent
Rent cover is essentially a way of saying ‘this is how many times a company’s ebitdar can pay the rent’, which is pretty useful if you’re a landlord/wannabe landlord.
(Remember ebitdar means ‘earnings before interest, tax, depreciation, amortisation and rent.)
The higher the value of the rent cover number generally means the smaller the risk to the landlord.
Conversely, the lower the value of the rent cover number, the larger the risk to the landlord. But, to counter that, it generally signifies the landlord is getting a lot of money from the tenant in rent. Which is fine until, you know, your tenant hits economic issues…
Company C’s ebitdar is £30 million and its rent is £20 million;
30,000,000 ÷ 20,000,000 = 1.5 so we say rent cover is 1.5x
But then Company C gets a new, greedier landlord and its rent goes to £25 million;
30,000,000 ÷ 25,000,000 = 1.2 so we say rent cover is 1.2x
As you can see, Company C would much prefer its old landlord.
Effort rate = rent ÷ ebitdar
This is another way of talking about how easily a tenant can pay rent based on their earnings. This is typically used on the continent.
Essentially, the higher the value of the effort rate number, the worse off the tenant is and the more exposed the landlord is and vice versa.
Let’s go back to Company C with its ebitdar of £30 million and its rent of £20 million;
20,000,000 ÷ 30,000,000 = 0.67 so we say the effort rate is 67%
Then when Company C gets its new greedier landlord and its rent goes up to £25 million;
25,000,000 ÷ 30,000,000 = 0.83 so we say the effort rate is 83%