Dear fellow participants,
Any one who has experience in valuing commercial real estate companies please help.
I am analyzing a company that owns one of the largest shopping malls in eastern Europe. Looking at their portfolio valuation by Cushman & Wakefield (3rd party appraiser), the only way I could arrive at the property value calculated for that property is to assume NOI margin at about 99%. C&W did provide the rental rates they assumed in valuation and the number of years after which the property would be sold.
Is this a realistic assumption to make? To me this looks rather aggressive. To maintain the property in current state I would expect operating expenses in high teens % wise. For those who have experience in investing in commercial real estate companies, do you believe the valuation by 3rd party appraisers are reliable?
Please let me know if you think my suspicions are valid. I would be grateful for any insight you could offer.
Seems unrealistic but this is coming from someone who does not know Europe. To your credit I could see something pretty high for a shopping mall like in the 70s given the fact that you have a lot of NNN pass-throughs, but 99% is hard to picture. If I had to guess I would say you're not using an aggressive enough cap rate.
ALSO, because you said you're looking at an entire company, it's very possible you could be missing something. NOI from JVs? Assets under construction? Recently acquired properties that aren't showing up in historicals yet? Are you growing historical income by X% to represent a "forward NOI"?
This is what perplexes. The company broke out its portfolio valuation property-by-property. The shopping center in question, makes up circa 90% of portfolio value. C&W also provided the discount rate and the cap rate used to calculate TV at the end of year 5. They also provided the rental rate assumed for valuation at the end of the horizon. All I had to do was to apply a geometric mean growth rate in the interim years to arrive at Year 5 rental rate provided. The model, by definition, is pretty simple and the one big variable remaining is NOI income.
The property in question is located in the country where commercial real estate is "in the eye of the storm" right now. If my suspicions are correct, and the assumptions used by 3rd party valuator are aggressive, the company is in for another large write down this summer, which probably explains why they are trading at such a discount to NAV.
The one thing that is slightly frustrating is that it causes me question independent consultants' valuations, whether in real estate or upstream oil & gas. Their models are smart but I also expect them to be reasonable in the assumptions they use.
Yes, it is a public company. This is a commercial real estate developer that owns large shopping center in Moscow's financial district, in addition to class A/B offices throughout the city. http://www.afi-development.com/en/investor-relations/reports-presentati… Open "Preliminary Financial Results 2014" file. Page 56 details assumptions used in valuation of the shopping center. C&W values the property at USD 1.0 bn. Using my assumptions, I can barely scratch USD 700 mm. Actual description of the property starts on p. 48 To give you context, total portfolio value of the company's yielding projects is USD 1.4bn. The fate of this company is tied to the success of failure of that shopping center.
I truly hope I missed something.
You already know what NOI is here, so your question has been answered, but just for kicks, as far as margins, look at page 50. They list revenue and opex for '12, '13, and '14 for this property. Last year they reported $107m in revenue and $24m in opex. So the mall's margins are in the 70s which is exactly what I guessed earlier.
Obviously the NOI used in the appraisal is way high, though. I'm guessing one reason is that it's been occupied in the mid-low 80s and the appraisal's "Representative occupancy rate for purposes of valuation" = 97%. It's also interesting that they use a cap rate of 10 when, correct me if I'm wrong, the interest rate on this property's debt is 9.5% in russian rubles.
Thank you very much for your input, I really appreciate that.
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