1. SCG Workshop #7: REIT Valuation

2. Agenda Notes on Real Estate Source of Value FFO and AFFO Valuation Final Notes

3. So about Real Estate There’s several kinds of real estate, and thus several kinds of REITs Multi family Residential Commercial Others

4. Real Estate Investment Trusts REITs for short Must pay out 90% of their earnings in dividends to their shareholders In exchange are exempt from any taxation – It’s as if you actually held the land

5. REITs galore Recently, everyone and their mother has tried to become a REIT Why? Well, there’s the tax thing, and REIT shares tend to be more expensive than others One prominent alternative to a “real” REIT is an mReit – a mortgage REIT

6. mREITs and more As the name suggests, they hold mortgages and other real estate linked securities Often times mostly agency-backed ones Other distinctions in REITs depends on the leasing agreements – E.g. Tenant may have to pay for maintenance of the building

7. Why are REITS valuable? Those dividends are nice for one mREITs in particular are tied to the yield curve – High spread leads to good results since they borrow the short end and lend at the long end In general, REITs are worth a multiple of the rent they collect on the property they own

8. Multiples :D A REIT is oftentimes valued very differently from a traditional company Why? Depreciation. Depreciation expense is not a cash expense to REITs, and property rarely really depreciates

9. FFO and AFFO So to calculate our valuation metric, we add back depreciation – Also take out gain on asset sales since they aren’t repeatable and don’t deserve a multiple We can then adjust that Funds from Operations metric by taking out maintenance costs, since they are real cash costs.

10. FFO and AFFO Net Income + Depreciation – Gain on Sale Gives you Funds from Operations (FFO) (REITs have to report this in 10-Ks) FFO – maintenance CapEx – other amort Gives you Adj. Funds from Operation (AFFO)

11. Valuation from there Most REIT Valuation runs off of one of 3 things 1) Comparable analysis – Compare P/FFO ratios across the board 2) Cap Rate analysis – Like the above but property-by-property 3) Dividend pricing – What’s the yield on this one compared to other FI

12. Final Notes Real Estate Investment Trusts usually won’t move with the broader market – Why? Bond Yields and the Yield curve can significantly alter the worth of a REIT – Why? Real Estate Valuation can become incredibly involved if you do it property-by-property – Throw in different lease terms and valuing an RE company can be as bad as valuing a bank