Hello,
REIT dummy here.
I am just wondering how do you usually value a REIT investment? My approach is to look at FFO or price to book (using a comp/multiple approach). How often do people use bottom-up/asset approach?
What are some other ways to look at REIT investment? What are some other important metrics to look at? NAV/share?
Thank you very much!
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The American market is primarily driven by FFO and implied cap rates. P/Book is difficult with US stocks as not everything on the BS is marked to market. I’d suggest a combination.
Europe on the other hand is marked to market and NAV is the crucial metric for most of the European stocks. Specifically the EPRA NAV which is a going concern NAV, not a liquidation NAV.
A notable exception is Germany which can be heavily driven by FFO and the FFO yield but NAV is still important.
The Nordic countries lack a REIT legislation and tend to move on the back of NAV and Cash earnings per share.
JREITs will often be driven by DPU growth where as developers can often move with ROE and similar metrics.
HK, Singapore and to a lesser extend China are earnings focussed - these markets can often be very momentum based.
You're the real mvp
P/FFO, P/AFFO & P/NAV are the predominate measures. AFFO is probably a stronger metric than a FFO, due to fact that eliminates CapEx and straight lines rents.
However, make sure to look at the various supplemental reports included in the 10-ks and 10-qs, as some REITs can often have "creative" methodologies in calculating these figures. That's because FFO and AFFO are measures recommended by NAREIT, as opposed to being enforced by GAAP or IFRS.
Are you asking about valuing a REIT from the perspective of an investor buying stock, or from a corporate M&A standpoint?
If from the marginal investor's standpoint, P/NAV is, IMO, the most relevant metric. I wouldn't pay for Prologis at a 25% premium to NAV and I'd buy Vereit at a 25% discount to NAV. These are larger premiums and discounts than you'll ever practically see, but unless there's a compelling reason that something is trading at material premium or discount, I won't buy it at a material premium or discount and vice-versa.
Would all due respect, I would have to disagree with Vereit. They still have too much exposure to Red Lobster and Walgreens. Furthermore, despite the re-branding, it still have ARC's footprint all over it.
Fair enough. I chose Vereit because it was the biggest clusterfuck I could think of, so I'm sure a case could be made that would justify a discount that large.
Is NAV usually reported? Where do you usually find NAV? I tried CapIQ formulas, but didn't get any NAV
I usually just calculate it.
The issue with P/NAV is the accuracy of the NAV firstly and also where is the NAV going. For example a 25% premium can easily become NAV at T+1 if the asset class is seeing material yield compression, for example.
There are always exceptions to the rule - a really interesting one I've come across is Warehouses de Pauw; Belgium REIT focussing on warehouses/industrial. Has consistently traded at a 50-70% premium to NAV over the last 5 years but returned c.20% TR last year. Never makes sense on an P/NAV basis but is easily justifiable on the adjusted EPS/FFO progression.
A combination of FFO and NAV is what I see most of the REIT teams at large AMs using - in various guises.
Also an interesting point is that due to a large portion of the market looking at NAV often a warranted prem./disc. can be given to a stock over a medium term and comparable stocks in similar asset classes can exhibit strong mean reversion.
Something worthwhile doing if you're looking for a good valuation point to enter a stock is looking at a 3 or 4 year Prem./Disc. to NAV chart and a similar one to FFO/AFFO.
Would echo the point on the 10-ks and 10-qs. Same store NOI is another useful metric for looking at how the companies a growing, you can often find companies having widely different definitions of what same store means.
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