Please Help w/ REIT Questions

anyone? would really appreciate the help

Authored by: Certified Real Estate Professional - Investment AnalystCertified Real Estate Pro

maddux

Orangutan

Check your inbox, sent you a 101 on REIT valuation.

StealthyOrangeOctopus

Baboon

maddux - would you mind also sending me your 101 on REIT valuation. Also curious about this. Thanks!

Authored by: Certified Real Estate Professional - 1st Year AnalystCertified Real Estate Pro

ZsdAGFVDSADS

Senior Monkey

Maddux, Any possibility you could send me your 101 insight as well? I am trying to grasp an understanding of the in's and out's of modeling PE alternative inv. Next month I am starting the WSO REIT technical course so I am seeking to absorb everything I can. Let me know, thanks.

FromNYCtoLAandback

Monkey

Hey maddux,

Could you also send me your 101 on REIT valuation? Thanks so much, appreciate it.

Wolf of Bourbon Street

Chimp

Would you be able to send it to me as well?

prospie

Best Response

IndenturedAgreement:
1. How often is a DCF used? If so, do you build out a full REIT Operating Model and then get to FCFE and discount that to present?

I am not in banking, but I can try to address some of these ... I have seen this done with AFFO, where it is assumed that FCFE = AFFO.

2. How often is a DDM used? If so, is it just the AFFO * Payout Ratio? So you really just need to build out an income statement and balance sheet in that case since you don't need to worry about debt repayments/schedules like you do when using FCFE?

I don't think anybody cares about the DDM approach, but I was taught to simply increase the dividend by whatever percentage is appropriate each year. Strikes me as overkill to build out all the backup for the dividend each year.

3. In a NAV model, how do you account for the Joint Venture line item on the balance sheet?

If you want, you can stick that book value of equity into your total value and call it a day. I've also seen pro rata JV NOI valued at a market cap rate, and pro rata JV debt backed out of the NAV calculation. If you want to break it out like that, just make sure you understand what's going on in that JV. Sometimes you can get the backup behind that JV line item as a separate financial statement.

Thanks Prospie, really appreciate you taking the time to write this. In regards to AFFO = FCFE, I am confused on one point. For a regular company, you deduct NWC and CapEx in your free cash flow calc to account for the company's reinvestment in the firm. For a REIT, you only deduct maintenance CapEx to maintain current buildings, and not the cash spent on acquisitions, developments, or cash received from dispositions. I was having trouble grasping why this is the case? Don't you need to assume the REIT uses some of the AFFO to grow its business?

Authored by: Certified Real Estate Professional - Investment AnalystCertified Real Estate Pro

prospie

IndenturedAgreement:

Thanks Prospie, really appreciate you taking the time to write this. In regards to AFFO = FCFE, I am confused on one point. For a regular company, you deduct NWC and CapEx in your free cash flow calc to account for the company's reinvestment in the firm. For a REIT, you only deduct maintenance CapEx to maintain current buildings, and not the cash spent on acquisitions, developments, or cash received from dispositions. I was having trouble grasping why this is the case? Don't you need to assume the REIT uses some of the AFFO to grow its business?

Yeah, this is a good point. As for NWC, what I was describing was super-simple and change in NWC is ignored. I should definitely point out the difference between how meticulous bankers are and how a buyside equities guy doesn't have time for all that shit.

But what I definitely failed to do a better job of detailing for you was this: the model in mind here has cash flow (after paying the dividend) being invested in new deals that create new AFFO based on a yield assumption across the board. That new AFFO is added to current portfolio AFFO each year for total cash flow, which is dsicounted to today.

I know that sounds complex but in this simplified case it's just a handful of line items. I can send if you want.

Thanks, Prospie. That helped explain the concept better. So basically AFFO being discounted = AFFO being paid out in Dividends + Value Creation from AFFO being reinvested? If you could send over the spread sheet that would be great as well!

Authored by: Certified Real Estate Professional - Investment AnalystCertified Real Estate Pro

prospie

IndenturedAgreement:

Thanks, Prospie. That helped explain the concept better. So basically AFFO being discounted = AFFO being paid out in Dividends + Value Creation from AFFO being reinvested? If you could send over the spread sheet that would be great as well!

close. AFFO regardless of dividends plus value creation from leftover AFFO being invested. if you wanted to discount the dividends then you'd be looking at more of a DDM approach.

with the model i'm describing, you can play with the payout ratio and see how a higher payout ratio could reduce future value creation.

Rent Roll

Hmm.. sorry if I am still not getting it but - since the AFFO is only discounting the cash flows after the dividends (meaning after income on the Same-Store properties).. the AFFO being discounted is value creation rather than complete value. So you would add the value creation from discounted AFFO to the current Same-Store properties?

If that is the case, how would you determine the value of the Same-Store properties?
Also, would discounting AFFO before dividends give you the value of the entire portfolio? Entire portfolio being the Same-Store properties + Value Creation from AFFO reinvested?

Authored by: Certified Real Estate Professional - Investment AnalystCertified Real Estate Pro

prospie

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