module 12
DESCRIPTION
MODULE 12. Public, Private, & Investment Performance. Are Equity REIT’s Stock or Real Estate ?. How Do Historical Returns of Indirect Vehicles for Real Estate Investment, Public and Private, Stack up Against One Another?. Do REIT’s Perform Like Small-Cap Stocks?. - PowerPoint PPT PresentationTRANSCRIPT
MODULE 12
Public, Private, & Investment Performance
Are Equity REIT’s Stock or Real Estate?
How Do Historical Returns of Indirect Vehicles for Real Estate Investment, Public and Private, Stack up Against One Another?
Do REIT’s Perform Like Small-Cap Stocks?
Will Future Performance of REIT’s Differ From the Past?
Comparing Ownership of Real Estate Alternatives
Direct vs. Indirect Ownership of Real Estate
Characteristics of Ownership Direct Indirect Interest Liability Transfer Rights ControlCharacteristics of Ownership Liquidity Performance Measure Term Investor Scale Economics of Scale Agent Relations
Private vs. Public Ownership
O pe n -e nd C lo sed -e nd R E IT
P riva te
E q u ity R E IT
P u b lic
Characteristics of OwnershipInterestLiability
Transfer RightsControl
Characteristics of Investment Vehicle
LiquidityTerm
Agent RelationsSource of Appreciation
Other Issues of Public Entities
Liquidity and Value Management and Investment
Decisions Operating Entity vs. Assets
Information: Public vs. Private Ownership of Real Estate
Type of Information Private Market Public MarketValue Periodic Appraisals Public Trading
Performance Individual Property Proprietary Public Domain Compensation Analysis Consultant Services Public Analysts
Asset Profiles Investment Annual Report, 10K Prospectus
Transactions Acquisitions Proprietary “News” Release Debt Proprietary “News” Release
Capital Raising Equity Proprietary “News” Release Debt Proprietary “News” Release
Insider Trades NA Market Tracking
Services
Financial Audits “Standard Practice” “Required Annual Report”
REIT Pricing Models
NAV Dividend-Multiple DCF Pure DCF REIT Scoring Model with Add-
ons
CAP Rates and Interest Rates: How Should they Relate?
REIT Yields and Market Interest Rates: What’s the Relationship?
Net Asset Values: Easily Accessible?
Appraisal Accuracy Costs
Multiple Comparisons Method
FFO x Multiple for FFO FAD x Multiple for FAD
Multiple Comparisons “Adjustments”
High Expected Growth Rates Low Level of Capital Expenditures Solid Market Fundamentals Focus/Expertise in Property Type or Locale Low Debt, High EBITDA Coverage Ratios High Debt Quality Low Dividend Pay-out (% of FFO or FAD) Quality Management Long, Stable History
Implicit Capitalization Rate Method
Calculate REIT’s Implicit CAP RateEquity Market Capitalization 600plus Outstanding Debt 300less Construction in Progress 100less Non-Real Estate Assets 100Implied Real Estate Value 700Aggregate Annualized Property Level NOI 55Implied CAP Rate 7.9%
Asset Valuation Method
NOI 55Market Cap Rates 9.0%Value of Property(Asset Value) 611Third Party Property Management Fees & Other Income 5Management Fee Multiple 5xValue of Management Fee and Other Income 25Development in Progress 50Expected Initial Return 10.0%Expected Initial $ 5Market CAP Rate 9.0%Value of Development Under Construction 56
Current REIT Valuations
Property Value 611Third Party Management Fees and Other Income 25New Development Value 56Gross Company Value 692Debt Outstanding (300)Net Company Value 392Shares Outstanding 10Value Per Share $39.20
Other Factors to Consider in Valuation
Management Asset quality Capital Structure Board of Directors
Track Record: Strong Returns and Portfolio Growth
Scale Returns
Composition of REIT Total Returns
Dividend Yield 8% Average “Same Store” NOI Increase 3-5% Investment of Retained Earnings 1% Acquisitions/Development ? Efficiency Gains ? Restructuring Gains ?
Total Return 12-14%
DCF Model: Issues and Problems
Accurate Inclusion of Risk/Rewards Valuation Effects of Level and Current
Development Options
Proper Inclusion of Debt Structural Features of Corporation
Scoring Models
Use DCF and/or NAV to Aid Analysis
Use Key Qualitative/Quantitative Variables
Green Street Advisors Model
A Two Step Model
1. Corporate NAV
2. Adjust for Special
Circumstances of REIT
REIT Value Vis-à-Vis NAV
Liquidity Value-Added Option Potential Efficient Operations Diversification Franchise Value
Green Street Advisors, Inc.Example of Scoring Model (Page 9, and
Appendix A)
Variable Selection Franchise Value Inside Ownership Focus Potential Conflicts Overhead Expenses Balance Sheet Activity
DEBT...A Four Letter Word?
Scenario with 35%
DebtEBITDA $ 60
Debt $263 (35%)
Cost of Debt Service 8.0%
Equity $487 (65%)
Cost of Equity 12.0%
Total Capitalization 750 (100%)
Weighted Cost of
Capital 10.6%
Coverage Ratio 2.9:1
Scenario with 45%
Debt $ 60
$338 (45%)
8.0%
$412 (55%)
12.0%
750 (100%)
10.2%
2.2:1
How Do REIT’s Grow? Internal
- Revenue
- Costs External
- Acquisition
- Merger Financial Engineering
- Capitalization Factor
- Leverage