I'm trying to understand the basics of valuation metrics used within the RE space, and from what I understand, the most used are:
1) NAV - NOI + Assets - Liabilities (all marked to market), essentially the entire value of the firm/REIT 2) Cap Rates - mostly used for asset level analysis and can be applied to NOI to figure out a fair value for property
Valuation metrics: 1) Price/NAV 2) Price/FFO 3) ???
My questions are:
1) From what I understand, the typical way to value RE firms at the property level would be DCF, Income approach (NOI/Cap Rate), Expense approach (rebuilding entire asset today) and at the corporate level would be (NAV) as well as some equity value calculations for public firms (Price/NAV, Price/FFO)
Why do we use Equity Value in these valuation metrics? Are there more I'm missing? Is NAV = Enterprise Value for typical corporate companies? I'm just used to seeing so many typical valuation metrics such as EV/Revenue, EV/EBITDA, EV/EBIT, and so forth that I'm having a hard time conceptualizing the RE counterparts.
SS Revenue Growth is another key metric beyond NAV that analysts consider. I recently read a piece that discussed cash flow multiples and cash flow growth potentially taking emphasis over NAV and SS Rev due to the increasing number of investors looking at REITs with real estate's new classification. Price/AFFO multiples are also another item we look at to gauge how expensive REITs are relative to one another as AFFO is the best measure of REIT cashflow (FFO - recurring CapEx + adjustment for non-cash straight line rent). REITs are so depreciation intensive and generate nearly all of their cash flow on the assets they own (the real estate) making the value of the underlying portfolio assets the most applicable metric to evaluate them on. Furthermore, private market real estate is evaluated via cap rates and net operating income at the asset level, enabling a quick comparison of a REIT's geographic holdings with private market cap rates to gauge a discount or premium to NAV the REIT trades at.
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