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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


Notes on Real Estate

Source of Value



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