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IntermediateBrazilian REITs · Lesson I2.3 · Module I2

Reserves, reinvestment and capital returns

Module I2: What the fund can (and can't) do

11 slides~5 minquiz at the end

In this lesson

  • Gain and principal from a sale
  • Reinvest vs return capital
  • Why capital returns inflate yield
See the slides
Glass jar used as a piggy bank, with coins and a bill

Brazilian REITs · Lesson I2.3

Keep, reinvest or give back?

What the fund does with money that is not income — and why a capital return is not income.

A property sold

R$ 30M comes in and splits in two

Sale: R$ 30Mthe property had cost R$ 25M
Gain: R$ 5M95% or more becomes income
Principal: R$ 25Mreinvest or return

Principal is not profit, so it is outside the 95% rule (lesson I2.2).

The gain, per share

A fund with 1 million shares

R$ 5Mgain×95%=R$ 4.75M
R$ 4.75M÷1,000,000shares=R$ 4.75per share, at least

The R$ 25M of principal

Two possible paths

Reinvest

R$ 100

  • buys another asset, per the policy
  • the share keeps R$ 100 of book value

Return capital

R$ 75

  • pays R$ 25 per share back to you
  • book value per share falls from R$ 100 to R$ 75

Nobody gained

A capital return is your money coming back

R$ 75share after+R$ 25returned=R$ 100same as before

The equity only moved: it left the fund and went to your account.

The fake yield

R$ 1 of income + R$ 20 of capital return

Adding it all

21%

  • R$ 21 ÷ R$ 100 share: looks like huge income

Income only

1%

  • R$ 1 ÷ R$ 100: what recurs

The reserve

Saving helps — and can hide things

  • Up to 5%of cash profit may stay in the fund
  • Contingencyreserves set in the bylaws
  • Weak monththe reserve keeps income steady
  • Warning signa shrinking reserve can hide weaker earnings (lesson I4.3)

Remember this

Three ideas from this lesson

  1. Gain vs principalCash gain goes into the 95%; principal is free.
  2. Returning capital is not yieldThe share loses exactly what you receive.
  3. Yield uses income onlyAdding capital returns inflates the number.

Quick quiz · 1 of 2

It paid R$ 1.00 of income and R$ 20.00 of capital return. What goes into recurring yield?

See answer

R$ 1.00. The R$ 20.00 is capital returned: the share loses that value and it does not recur.

Quick quiz · 2 of 2

A share with R$ 80 of book value returns R$ 10. What is left per share?

See answer

R$ 80 − R$ 10 = R$ 70. You keep R$ 70 in the share and R$ 10 in cash: the same R$ 80.

Lesson complete

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I3.1Intermediate · Lesson I3.1The manager's report: must you read it?A ten-minute checklist and the habit that catches hidden setbacks.Continue
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Educational content, written for learners. Not investment advice.