Level2 Alt Publicly Traded Real Estate Securities

CFA Level II Alternative Investments
Publicly Traded Real Estate Securities
Presented by: Arif Irfanullah

www.arifirfanullah.com
Contents
1.
2.
3.
4.
5.
6.
7.
8.
Introduction
Types of Publicly Traded Real Estate Securities
Publicly Traded Equity REITs
Real Estate Operating Companies
Valuation: Net Asset Value Approach
Valuation: Relative Value (Price Multiple) Approach
Valuation: Discounted Cash Flow Approach
REIT Valuation: Mini Case Study
2. Types of Publicly Traded Real Estate Securities

Public
Equity
Debt
Private
Equity REITS
Private REITs
REOCs
Private REOCs
Mortgage REITs
Mortgage
CMBS
Private Debt
RMBS
Bank Debt
3. Publicly Traded Equity REITs

Equity REITs
Mortgage REITs and
Hybrid REITs
3.1 Market Background
3.2 REIT Structure

UPREIT
DOWREIT
3.3 Investment Characteristics
3.4 Considerations in Analysis and Due Diligence

Assess specific investment characteristics, opportunities and risks
3.5 Equity REITs: Property Subtypes

Most REITs are specialized
10
11
12
3.6 Economic Drivers

Factors impacting economic value of different property types
Example 4
13
4. Real Estate Operating Companies

REOCs are ordinary taxable corporations
Operate in countries that do not have tax-advantaged REIT regime
Most advantages and disadvantages similar to REITs
Face similar operating and financial risk as private real estate investments
Equity markets generally show preference to REITs
Example 5
14
5. Valuation: Net Asset Value Approach

Valuation approaches: Asset Value Based, Price Multiple Comparison, Discounted Cash Flow
BVPS
NAVPS
Shares can trade a discount or premium relative to NAVPS
NAVPS is the largest component of intrinsic value
5.1 Accounting for Investment Properties
15
5.2 Net Asset Value Per Share:

Calculation
Less: Other liabilities

Net asset value
16
5.3 Net Asset Value Per Share: Application

NAV is used by different kinds of investors
NAV reflects value of REIT assets to a private market buyer
Public equity investors might have different perspective
Static pool of assets
Estimates problematic if transaction data is limited
REIT investors have liquidity; private investors do not

REITs likely to have above average management teams
Example later in the reading

17
6. Valuation: Relative Value (Price Multiple) Approach

6.1 Relative Value Approach to Valuing REIT Stocks
P/FFO, P/AFFO, EV/EBITDA
Three main drivers behind these multiples:
1. Expectations for growth in FFO/AFFO
2. Risk associated with underlying real estate
3. Risk associated with capital structure and access to capital
18
6.2 Funds from Operations and Adjusted Funds from Operations

FFO is accounting net earnings excluding:
1. Depreciation charges on real estate
2. Deferred tax charges (deferred portion of tax expenses)
3. Gains/losses from sale of property and debt restructuring
AFFO is a refinement to FFO
AFFO = FFO - straight line adjustment recurring maintenance

type capital expenditures and leasing commissions
Example 6
AFFO is the best measure of economic return to shareholders

Example 7
19
6.3 P/FFO and P/AFFO Multiples:

Advantages
1. Widely accepted
2. PMs can put REIT valuations into context with other investment alternatives
3. FFO estimates are readily available
4. Can be used in conjunction with growth rates and leverage levels for relative value analysis
Drawbacks
1. Does not capture intrinsic value of all real estate assets
2. P/FFO does not adjust for recurring capital expenditures
3. One time gains/losses create issues with this model

20
7. Valuation: Discounted Cash Flow Approach

Dividend discount model works for REIT valuation
Two or three step DDM
Four key considerations when forecasting long term growth rates:
1. Internal growth potential

2. Investment activities
3. Capital structure
4. Retaining and reinvesting portion of cash flow
Example 8
21
8. REIT Valuation: Mini Case Study

Very Important!
Shows financial statements and disclosures for a REIT
Note that FFO and AFFO are provided
All three valuation methods are used

Each give a different value
Example 9
Example 10
22
Conclusion
23

Level2 Alt Publicly Traded Real Estate Securities

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Level2 Alt Publicly Traded Real Estate Securities

Uploaded by

Copyright:

Available Formats

CFA Level II Alternative Investments

Publicly Traded Real Estate Securities

Presented by: Arif Irfanullah

2. Types of Publicly Traded Real Estate Securities

3. Publicly Traded Equity REITs

3.1 Market Background

3.2 REIT Structure

3.3 Investment Characteristics

3.3 Investment Characteristics

3.3 Investment Characteristics

3.4 Considerations in Analysis and Due Diligence

3.5 Equity REITs: Property Subtypes

3.5 Equity REITs: Property Subtypes

3.5 Equity REITs: Property Subtypes

3.5 Equity REITs: Property Subtypes

3.6 Economic Drivers

4. Real Estate Operating Companies

5. Valuation: Net Asset Value Approach

5.1 Accounting for Investment Properties

5.2 Net Asset Value Per Share:

Less: Other liabilities

5.3 Net Asset Value Per Share: Application

Estimates problematic if transaction data is limited

REIT investors have liquidity; private investors do not

Example later in the reading

6. Valuation: Relative Value (Price Multiple) Approach

6.2 Funds from Operations and Adjusted Funds from Operations

AFFO is a refinement to FFO

AFFO = FFO - straight line adjustment recurring maintenance

AFFO is the best measure of economic return to shareholders

6.3 P/FFO and P/AFFO Multiples:

3. One time gains/losses create issues with this model

7. Valuation: Discounted Cash Flow Approach

1. Internal growth potential

8. REIT Valuation: Mini Case Study

All three valuation methods are used

You might also like