MODULE 12
Public, Private, & Investment
Performance
 Are
Equity REIT’s Stock or
Real Estate?
 How
Do Historical Returns of
Indirect Vehicles for Real Estate
Investment, Public and Private,
Stack up Against One Another?
 Do
REIT’s Perform Like SmallCap Stocks?
 Will
Future Performance of
REIT’s Differ From the Past?
Comparing Ownership of Real
Estate Alternatives
Direct vs. Indirect Ownership of
Real Estate
Characteristics of Ownership
 Interest
 Liability
 Transfer Rights
 Control
Characteristics of Ownership
 Liquidity
 Performance Measure
 Term Investor Scale
 Economics of Scale
 Agent Relations
Direct
Indirect
Private vs. Public Ownership
Public
Private
Open-end
Closed-end
REIT
Equity REIT
Characteristics of Ownership
Interest
Liability
Transfer Rights
Control
Characteristics of Investment
Vehicle
Liquidity
Term
Agent Relations
Source of Appreciation
Other Issues of Public Entities
 Liquidity
and Value
 Management and Investment
Decisions
 Operating Entity vs. Assets
Information: Public vs. Private Ownership of Real Estate
Type of Information
Private Market
Public Market
Value
Performance
 Individual Property
 Compensation Analysis
Periodic Appraisals
Public Trading
Proprietary
Consultant Services
Public Domain
Public Analysts
Asset Profiles
Investment
Prospectus
Annual Report, 10K
Transactions
 Acquisitions
 Debt
Capital Raising
 Equity
 Debt
Insider Trades
Proprietary
Proprietary
“News” Release
“News” Release
Proprietary
Proprietary
NA
Financial Audits
“Standard Practice”
“News” Release
“News” Release
Market Tracking
Services
“Required Annual Report”
REIT Pricing Models
 NAV
 Dividend-Multiple
 Pure
DCF
DCF
 REIT Scoring Model with Addons
CAP Rates and Interest Rates:
How Should they Relate?
REIT Yields and Market Interest
Rates: What’s the Relationship?
Net Asset Values: Easily
Accessible?
 Appraisal Accuracy
 Costs
Multiple Comparisons Method
 FFO
x Multiple for FFO
 FAD x Multiple for FAD
Multiple Comparisons
“Adjustments”









High Expected Growth Rates
Low Level of Capital Expenditures
Solid Market Fundamentals
Focus/Expertise in Property Type or Locale
Low Debt, High EBITDA Coverage Ratios
High Debt Quality
Low Dividend Pay-out (% of FFO or FAD)
Quality Management
Long, Stable History
Implicit Capitalization Rate
Method

Calculate REIT’s Implicit CAP Rate
Equity Market Capitalization
plus Outstanding Debt
less Construction in Progress
less Non-Real Estate Assets
Implied Real Estate Value
Aggregate Annualized Property Level NOI
Implied CAP Rate
600
300
100
100
700
55
7.9%
Asset Valuation Method
NOI
Market Cap Rates
Value of Property
(Asset Value)
Third Party Property Management Fees &
Other Income
Management Fee Multiple
Value of Management Fee and Other Income
Development in Progress
Expected Initial Return
Expected Initial $
Market CAP Rate
Value of Development Under Construction
55
9.0%
611
5
5x
25
50
10.0%
5
9.0%
56
Current REIT Valuations
Property Value
611
Third Party Management Fees and
Other Income
25
New Development Value
56
Gross Company Value
692
Debt Outstanding
(300)
Net Company Value
392
Shares Outstanding
10
Value Per Share
$39.20
Other Factors to Consider in
Valuation
 Management
 Asset
quality
 Capital Structure
 Board of Directors
Track Record: Strong Returns
and Portfolio Growth
 Scale
 Returns
Composition of REIT Total
Returns






Dividend Yield
Average “Same Store” NOI Increase
Investment of Retained Earnings
Acquisitions/Development
Efficiency Gains
Restructuring Gains
Total Return
8%
3-5%
1%
?
?
?
12-14%
DCF Model: Issues and
Problems


Accurate Inclusion of Risk/Rewards
Valuation Effects of Level and Current
Development Options


Proper Inclusion of Debt
Structural Features of Corporation
Scoring Models
 Use
DCF and/or NAV to Aid
Analysis
 Use Key
Qualitative/Quantitative
Variables
Green Street Advisors Model
 A Two
Step Model
1. Corporate NAV
2. Adjust for Special
Circumstances of REIT
REIT Value Vis-à-Vis NAV
 Liquidity
 Value-Added
Option Potential
 Efficient Operations
 Diversification
 Franchise Value
Green Street Advisors, Inc.
Example of Scoring Model (Page 9, and
Appendix A)
Variable Selection
 Franchise Value
 Inside Ownership
 Focus
 Potential Conflicts
 Overhead Expenses
 Balance Sheet
 Activity
DEBT...A Four Letter Word?
Scenario with 35%
Debt
EBITDA
Debt
Cost of Debt Service
Equity
Cost of Equity
Total Capitalization
Weighted Cost of
Capital
Coverage Ratio
$ 60
$263 (35%)
8.0%
$487 (65%)
12.0%
750 (100%)
10.6%
2.9:1
Scenario with 45%
Debt
$ 60
$338 (45%)
8.0%
$412 (55%)
12.0%
750 (100%)
10.2%
2.2:1
How Do REIT’s Grow?



Internal
- Revenue
- Costs
External
- Acquisition
- Merger
Financial Engineering
- Capitalization Factor
- Leverage