Modelling and Valuing a REIT

george_robert's picture
Rank: Chimp | banana points 11

Hi WSO,

I am doing a research report/valuation on a Canadian-based REIT (TSE:BAM.A). Does anyone have suggestions on what to model for the firm and what valuation format to use. It seems that a NAV would be appropriate but time consuming. A DCF is also applicable but would be riddled with forecasting errors for all line items due to different sensitivities across all line items which would be hard to model.

Please let me know if you have examples or experience valuing a REIT and what valuation model you prefer.

-George Robert

Comments (35)

Feb 25, 2015

I might be a little off on this, but for REIT's the most commonly accepted way of valuing them is through Funds From Operations (FFO). FFO is intended to make adjustments on Net Income that accounting methods may distort in order to find the true value from operating cash flow. Simply, FFO = Net Income + Depreciation + Amortization - Gains on Sale of property.

You should be able to find all those items from BAM.A financial statements.

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Feb 25, 2015

Not sure if this is for work or school but I would definitely expect to see an NAV/Capitalization tab along with an income statement that rolls to both FFO and AFFO (along with BS/CF/assumptions/etc.). Per share metrics should include: FFO, AFFO, EBITDA and Operating Cash Flow. I would also want to see the full CAM/expense break-down along with a full blown debt schedule.

May 31, 2015

Thank you very much, along the lines of what I had done already. Used FFO and AFFO to value different segments and made a sum of parts NAV. Thanks again

- George Robert

May 31, 2015

Bump. Anyone?

May 31, 2015

Maybe Greenstreet ???

May 31, 2015

Thanks, I'll check if I can get access through my uni. Anyone else?

May 31, 2015

BIWS has an online course.

Robert Clayton Dean: What is happening?
Brill: I blew up the building.
Robert Clayton Dean: Why?
Brill: Because you made a phone call.

May 31, 2015

Yeah I've seen the course... would prefer not to spend $250...

May 31, 2015

REIT valuation textbooks/modelling resources include
1. Real Estate Finance and Investment 14th ed by Brueggeman, Fisher which is a leading
2. Real Estate Finance 9th Edition - John.P.Wiedemer, K.Keith Baker
3.Global Real Estate Trusts, Process and Management by David Parker which specifically covers IB/PE/Funds Management and Cap Trans, it is quite comprehensive would be regarded as a leading book of REIT/PE practitioners
I'm sure i have some other stuff lying around my computer
- PM if interested, willing to share my copies

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May 31, 2015

Honestly, try to do a combination of DCF and Market (Previous Transactions/multiples). Find an average value by using a football field and go with that. Each asset category needs to be broken down, but of course, not into minute detail since this is still basically an approximation.

May 31, 2015

thats not how you value a REIT.

May 31, 2015

Give them the FFO definition. And yes, you discount AFFO for the DCF model.

    • 1
May 31, 2015

thanks =)

May 31, 2015

That is correct regarding the AFFO. Also, as a heads up, not all REITs call it AFFO. Many refer to it simply as Cash Available for Distribution (CAD).

May 31, 2015

You also have to take out non-cash rent. For example, instead of paying the landlord 500 in rent, you pay 475 and mow his lawn. That's taking out to arrive at affo.

May 31, 2015

Lol for some reason your example made me laugh

May 31, 2015

hi, in order to calculate FFO.. Do I have to subtract Net Valuation Gains on Investment Property?

May 31, 2015

Dude, stop just posting your hw or potential interview questions on here if you aren't going to make any effort to learn.

If you genuinely want to learn, then tell me about what a DCF is good for and then tell me about the structure of a REIT (i.e. how is cash flow generated). Once it seems like you actually tried to grasp what is going on, then I'd be happy to answer your question. But at least try before coming here.

    • 1
May 31, 2015

Maybe hold it as a percentage of operating income? Then project out an average of the historical percentages (so if taxes for FY2013 were 20% of op. income and FY2014 taxes were 19% of op. income, I would project out 19.5% for 2016, 2017 etc) . I haven't modeled this out before so I might be wrong but it's one way I'd start thinking about it.

May 31, 2015

Have never really modelled REITs, but wouldn't it be 0% or near 0%?

May 31, 2015

There are no corporate taxes, unless a REIT has a TRS.

Property taxes are considered OpEx for REITs, usually ~1% of asset value; but very difficult to model appropriately.

If you're practicing modeling and you have no banking experience, IRM is a horrible case study in the sense that they are an extremely complex company with a very intricate capital structure.

May 31, 2015

Would it work to project the average historical tax margin as a percent of gross profit then? So maybe adding it as another line under SG&A? Curious to know if I was on the right track- thanks!

May 31, 2015

i don't think you understand what he's saying. property taxes =/= income taxes. there's no taxes at the corporate level for a REIT unless it has a TRS like BBwayne said. i've seen property taxes modeled a couple different ways. would probably just do it as a % of rent revenue for simplification.

    • 1
May 31, 2015

Oh ok that makes more sense now. Thanks for clearing it up- thats a tricky line +1 SB

May 31, 2015

I believe mortgage REIT act more like banks and financial institutions according to my BIWS course

May 31, 2015

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May 31, 2015