Assessing profitability of real estate developer - help needed!!! - What approach is used in the industry?
I wanted to ask what approach is used in the industry to assess the profitability of real estate developers. I am talking about the ones that develop both residential properties (construct inventory and then sell) and commercial properties (keep as investment properties and lease them out).
The problem of using income statement items (EBITDA etc) is that revenues from sale of residential properties are recognised only when the ownership of the development is transferred - typically happens in the last year of the construction. As a result, such revenues tend to be very erratic and lumped/clustered in certain years, which hinders comparability of numbers between different periods (unlike with rent income which is more stable).
In light of the above, what other ways can I use to assess how profitable the developer has been over the past several years? I would be v. grateful for any input you guys can provide.
That's part of the reason there are few (0?) public real estate developers. Developers really have no business being public companies. As far as real estate owning companies, there are a number of ways to look at their performance. Out of curiosity, are you looking to value this entity, or just look at its past performance?
Thanks Abrooks. I am just looking to analyse its past performance and compare it to its international peers, in terms of profitability. Ultimately this ties in how effectively the company used its invested capital.
bump
You need to look at the company on a project by project basis. Each project will have its own IRR/ROE.
Assessing profitability of real estate developer - help needed!!! - Income statement items (Originally Posted: 05/15/2012)
I wanted to ask what approach is used in the industry to assess the profitability of real estate developers. I am talking about the ones that develop both residential properties (construct inventory and then sell) and commercial properties (keep as investment properties and lease them out).
The problem of using income statement items (EBITDA etc) is that revenues from sale of residential properties are recognised only when the ownership of the development is transferred - typically happens in the last year of the construction. As a result, such revenues tend to be very erratic and lumped/clustered in certain years, which hinders comparability of numbers between different periods (unlike with rent income which is more stable).
In light of the above, what other ways can I use to assess how profitable the developer has been over the past several years? I would be v. grateful for any input you guys can provide.
I am also in the midst of valuing a real estate developer and from what have looked at so far they often pre-sell the apartments and depending on regulations etc. are then allowed to recognize the revenue before construction, is finished. if they then limit the amount of apartments presold in a certain quarter/year they can effectively manage revenue. don't know if this applies for the company u r looking at though.
If it really is that clustered though then i guess u would have to estimate the completion date of each property. often those firms set target gross margins so get/estimate those and opex should remain relatively stable, maybe with advertising higher before and at completion, just compare quarters/years with &, without property sales. you should be able to get a feeling for it then.
for valuation then you would usually use NAV and maybe DCF
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