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SCG Workshop #7: REIT Valuation PowerPoint PPT Presentation


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SCG Workshop #7: REIT Valuation. Agenda. Notes on Real Estate. Source of Value. FFO and AFFO. Valuation. Final Notes. So about Real Estate. There’s several kinds of real estate, and thus several kinds of REITs Multi family Residential Commercial Others. Real Estate Investment Trusts.

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SCG Workshop #7: REIT Valuation

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Scg workshop 7 reit valuation

SCG Workshop #7: REIT Valuation


Agenda

Agenda

Notes on Real Estate

Source of Value

FFO and AFFO

Valuation

Final Notes


So about real estate

So about Real Estate

  • There’s several kinds of real estate, and thus several kinds of REITs

  • Multi family

  • Residential

  • Commercial

  • Others


Real estate investment trusts

Real Estate Investment Trusts

  • REITs for short

  • Must pay out 90% of their earnings in dividends to their shareholders

  • In exchange are exempt from any taxation

    • It’s as if you actually held the land


Reits galore

REITs galore

  • Recently, everyone and their mother has tried to become a REIT

  • Why? Well, there’s the tax thing, and REIT shares tend to be more expensive than others

  • One prominent alternative to a “real” REIT is an mReit – a mortgage REIT


Mreits and more

mREITs and more

  • As the name suggests, they hold mortgages and other real estate linked securities

    • Often times mostly agency-backed ones

  • Other distinctions in REITs depends on the leasing agreements

    • E.g. Tenant may have to pay for maintenance of the building


  • Why are reits valuable

    Why are REITS valuable?

    • Those dividends are nice for one

    • mREITs in particular are tied to the yield curve

      • High spread leads to good results since they borrow the short end and lend at the long end

    • In general, REITs are worth a multiple of the rent they collect on the property they own


    Multiples d

    Multiples :D

    • A REIT is oftentimes valued very differently from a traditional company

    • Why? Depreciation.

    • Depreciation expense is not a cash expense to REITs, and property rarely really depreciates


    Ffo and affo

    FFO and AFFO

    • So to calculate our valuation metric, we add back depreciation

      • Also take out gain on asset sales since they aren’t repeatable and don’t deserve a multiple

    • We can then adjust that Funds from Operations metric by taking out maintenance costs, since they are real cash costs.


    Ffo and affo1

    FFO and AFFO

    • Net Income + Depreciation – Gain on Sale

    • Gives you Funds from Operations (FFO)

    • (REITs have to report this in 10-Ks)

    • FFO – maintenance CapEx – other amort

    • Gives you Adj. Funds from Operation (AFFO)


    Valuation from there

    Valuation from there

    • Most REIT Valuation runs off of one of 3 things

    • 1) Comparable analysis

      • Compare P/FFO ratios across the board

    • 2) Cap Rate analysis

      • Like the above but property-by-property

    • 3) Dividend pricing

      • What’s the yield on this one compared to other FI


    Final notes

    Final Notes

    • Real Estate Investment Trusts usually won’t move with the broader market

      • Why?

    • Bond Yields and the Yield curve can significantly alter the worth of a REIT

      • Why?

    • Real Estate Valuation can become incredibly involved if you do it property-by-property

      • Throw in different lease terms and valuing an RE company can be as bad as valuing a bank


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