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IntermediateBrazilian REITs · Lesson I4.9 · Module I4

Concentration: one tenant can bring it all down

Module I4: Analysis indicators

11 slides~5 minquiz at the end

In this lesson

  • Asset, tenant and region
  • Fixed costs amplify the drop
  • Three questions about the top tenant
See the slides
Hospital seen from above at night

Brazilian REITs · Lesson I4.9

15 properties, one single risk

Diversification is measured in revenue, not in the number of buildings.

Who the revenue comes from

One tenant pays more than all the others

  1. 60%A
  2. 10%B
  3. 8%C
  4. 7%D
  5. 5%E
  6. 10%others

Share of revenue each tenant pays. Many names; the risk lives in the red bar.

Three baskets to check

Where concentration hides

  • AssetOne building or one CRI makes up most of it.
  • Tenant or borrowerOne company pays most of the rent or interest.
  • RegionEverything in the same city, the same district.

By this site's yardstick, what breaks a fund is the asset, not the asset class.

The 60% tenant leaves

Fixed costs stay

R$ 1Mrevenue before−R$ 150Kfixed costs=R$ 850Kincome
R$ 400Krevenue after−R$ 150Ksame costs=R$ 250Kincome

Monthly figures. Building fees, taxes and upkeep don't leave with the tenant.

The fixed-cost effect

Revenue falls 60%. Income falls 70.6%.

Revenue

−60%

  • From R$ 1M to R$ 400K

Income

−70.6%

  • From R$ 850K to R$ 250K

R$ 150K in fixed costs

Income falls faster than revenue

  1. revenue −20%−23.5%
  2. revenue −40%−47.1%
  3. revenue −60%−70.6%
  4. revenue −80%−94.1%

Drop in the income that becomes distributions. From the left: revenue −20%, −40%, −60% and −80%.

How to read a fund

Three questions about the biggest tenant

  1. How much does it pay?% of revenue, not of area
  2. When does it expire?its lease (lesson I4.6)
  3. What if it leaves?penalty, collateral and who would move in

Repeat for the largest asset and the heaviest region.

Remember this

Three takeaways

  1. Count revenue, not buildings15 properties with 60% from one tenant isn't diversified.
  2. Fixed costs amplifyIncome falls more than revenue.
  3. Three basketsAsset, tenant or borrower, and region.

Quick quiz · 1 of 2

Revenue falls 50% and all costs are fixed. Income falls:

See answer

More than 50%. Costs stay whole and eat a bigger slice of a smaller revenue.

Quick quiz · 2 of 2

Revenue R$ 500K, fixed costs R$ 100K. The 40% tenant leaves. Income falls:

See answer

Before: R$ 500K − R$ 100K = R$ 400K. After: R$ 300K − R$ 100K = R$ 200K. Half the income is gone.

Lesson complete

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Image credits
  • Tom Fisk · Pexels · Pexels License — Pexels
  • Wilfredor · Wikimedia Commons · CC BY-SA 4.0 — Wikimedia Commons

Educational content, written for learners. Not investment advice.