REIT Accretion & Dilution Model
I'm deep in the process at a large REIT and only have asset level financial modeling experience. Can someone share resources on how to underwrite a property from an accretion/dilution perspective?
You don't really underwrite a property from an accretion/dilution perspective. It's really a math problem once you have the yield of the property figured out. Below is a very simplified example. Note, people do different parts of this differently.
Say BigPropReit's stock is trading at $50 a share and has 100M shares for a market cap of $5B. The consensus analyst FFO for BigProp is $2.50 a share. Therefore, the stock's FFO yield is 5%.
BigProp is under contract to buy a building for $100M. You think the yield cap rate is 6%. What's the accretion/diluation? Well, how is BigProp going to pay for this?
1) existing cash on their balance sheet. Let's say the cash was in an account yielding 4%. Therefore, accreition is $100M * (6% yield - 4% yield) / # of shares = $0.02 a share accretion. Yay!
2) sell an existing property, let's assume the yield on what we sold was 7%. Now our math is $100M * (6% - 7%)/ # of shares = (0.01) dilution. Boo! But this is pretty common "capital recycling"
3) issue debt, assume 5% bonds. Accretion of $0.01. But your leverage ratio went up.
4) issue stock, again assume 5% after issuance costs. Accretion of $0.01. leverage ratio down.
5) some make believe combo of debt and equity, in which case you get the weighted avg. cost of capital and do the same math problem
this is all simplified. A lot of ppl use AFFO + a long term growth rate.
The best spot you can be in REITland is when your implied cost of equity is way below your investment opportunities. This is where a REIT like Welltower sits. Their stock is priced at under 4% and they have tons of things to buy at 8%. Therefore earnings per share, book value per share, etc. all will increase and the stock is in a "virtuous cycle"
Thanks I love you.
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