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CFA Level II Alternative Investments

Publicly Traded Real Estate Securities

Presented by: Arif Irfanullah


www.arifirfanullah.com

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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
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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

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3. Publicly Traded Equity REITs


Equity REITs
Mortgage REITs and
Hybrid REITs

3.1 Market Background

3.2 REIT Structure


UPREIT
DOWREIT

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3.3 Investment Characteristics

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3.3 Investment Characteristics

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3.3 Investment Characteristics

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3.4 Considerations in Analysis and Due Diligence


Assess specific investment characteristics, opportunities and risks

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3.5 Equity REITs: Property Subtypes


Most REITs are specialized

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3.5 Equity REITs: Property Subtypes

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3.5 Equity REITs: Property Subtypes

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3.5 Equity REITs: Property Subtypes

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3.6 Economic Drivers


Factors impacting economic value of different property types

Example 4
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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

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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

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5.2 Net Asset Value Per Share:


Calculation

Less: Other liabilities


Net asset value

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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


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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

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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


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Example 7
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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


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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

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Example 8

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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
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Conclusion

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