How do you value a company which has a real estate development pipeline not yet completed/stabilised?

Hi All,

Wondering if anyone can help here.

I am trying to value a small US and European RE company which has two divisions. One is a successful operating arm where the property is fully stabilised at 95% occupancy (easy to value this piece). The second is a development divison, it has 32 developments which are yet to complete and those which are complete, are not near stabilisation. It takes a long time to fill the properties (about 2 yrs) due to some specific reasons but this is more due to the sector in which they operate and similar across competitors.

So I'm doing a DCF and wondering how to tackle the developement piece which will be about 40% occupied at the time of exit. Obviously it would be unfair to just capitalise the current income, as u end up leaving a lot of value on the table.

Any thoughts/links hugely appreciated!

Thanks,

Porto

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Comments (3)

May 25, 2021 - 7:46pm

As a buyer I would look at stepping into the investment today as a development, model out the cash flows (what do I need to put in to finish the building and stabilize it, and what do the stabilized cash flows in the future look like), and model an exit once it's stabilized (maybe a year after you finish lease up). After I'd done that I'd look at what my returns are (we look at IRR and Cfx) and whether the deal meets my return hurdles. If this were multifamily I would guess people looking to purchase this portfolio would model out somewhere between a 12%-18% levered IRR (yeah I know that's a huge range, but it depends on product type, location, hair on the deal, etc.), no idea on other product types.

May 25, 2021 - 11:57pm

You can make a ton of assumptions and do it all the hard way or you can just take all the appraisals and sum their valuation. If you want to do a DCF, just use the appraiser's assumptions for future cash flows, use the company's cost projections, apply your own discount assumptions, and complete your DCF that way. If the developments use construction loans, there will be appraisals on the properties. Alternatively, you could just use the DCF that the RE company likely put together for each property, and sum the cash flows. Properties under development are valued all the time. Luckily, you are not the first person to attempt this. 

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