Interest-Coverage Ratios

= EBITA / Interest expense

= (NI + Int. Exp. + Depreciation + Preferred Dividend) / Interest expense

Many analysts prefer to measure debt this way instead of looking at the debt/total-market-cap ratios or the debt/asset-value ratio, since this measurement gives a picture of how burdensome the debt service is in relation to current operating income.

Generally speaking, an interest-coverage ratio of below 2.0 will often be cause for some concern in most real estate sectors.

Yield Ratio

Dividend Yield

= (Quarterly dividend $xx.xx * 4) / Share price ($xx.xx) = Dividend Yield

Dividend Payout Ratio

If Dividend declared = $0.xx

1. Net Income Payout Ratio = Dividend declared ($0.xx) / Taxable Income per share [(Net Income + Minority Interest) / Shares and OPUs]

2. FFO Payout Ratio = Dividend declared ($0.xx) / FFO per share (FFO / Shares and OPUs)

Since new equity capital is so expensive, the best-man-aged REITs prefer to retain as much of their operating income as possible for acquisitions, developments, and other opportunities that invariably arise from time to time; using their own retained capital is cheaper than borrowing or selling additional shares.

A low payout ratio is also good insurance against unexpected events that might cause a temporary downturn in FFO.

Thus, REITs with low payout ratios will normally have better growth potential, as well as better perceptions of safety, and thus, higher stock prices.

REIT Investment Value

1. P/FFO Ratio

Why matter?

- Since today many more REITs are truly businesses and not just collections of real estate, some investors reject the NAV approach, which ignores the REIT’s value as a business enterprise. If we use P/FFO ratios to value and compare regular common stocks, the argument goes; we should use P/FFO ratios to value and compare REIT stocks.

P/FFO ratio = Price / FFOPS (FFO per share) = FFOX (P/E multiple)

So, Price = FFOPS x FFOX, FFOPS = Price / FFOX = FFO / Share or OPUs

The P/FFO ratio approach works something like this: if we estimate FFO per share to be £2.50 for this year, and we think that it should trade at a P/FFO ratio of 12 times this year’s estimated FFO per share, then its stock would be fairly valued at 12 times £2.50, or £30. If it trades lower than that, it’s undervalued; if it trades higher than that, it’s overvalued.

Calculate NAV

Why NAV?

- Book value has always been a poor way to value real estate companies because offices, apartments, and other structures do not necessarily depreciate at a fixed rate each year, while land is carried at cost but tends to increase in value over time.

NAV objective: Determine value of common equity based on fair market value of assets and liabilities. NAV is denoted on a fully diluted share basis

Property Revenues

- Property O & M expenses

= NOI

- Recurring CapEx

= NOI after recurring CapEx (Quarter)

* 4

= Annualized NOI after recurring CapEx

/ Cap rate

= Estimated Fair Market Value (FMV) operating assets (Land, Bldg, Improvement, Furniture, Fixtures and equipment in GAAP but, not intangible assets)

+ Fee Business

+ Construction in progress (CIP)

+ Land held for Development + Commercial properties + Joint Ventures + Cash

+ Other assets + assets held for sale

= Total Assets

- Liabilities

- Preferred Stock – Redeemable Stock

= Total Common Equity Value (= Assets – Liabilities – Preferred Stock)

/ Common shares and units (Shares or OPUs fully diluted)

= Net Asset Value (NAV)

XYZ Retail REIT

Consolidated Balance Sheets

(In thousands, except per share data)

XYZ Retail REIT

Consolidated Statement of Income

(In thousands, except per share data)

1. Calculate FFO for the XYZ retail REIT for the 4th quarter of 2012

2. Most investors believe FFO has significant flaws as a metric and fails to capture some significant cash flow oriented items associated with real estate. As a result, adjustments are made to FFO to arrive at AFFO. Calculate AFFO for the XYZ retail REIT for the 4th quarter of 2012.

3. Assuming you bought the stock at the end of the day on 12/31/2012, what dividend yield would you expect on this investment for 2013?

4. What is the FFO payout ratio for the 4^th quarter?

5. Calculate the debt / market-cap ratio for the 4^th quarter?

6. Calculate the Interest-Coverage Ratios for the 4^th quarter?

7. What was the property Net Operating Income (NOI) for the 4^th quarter?

8. On an economic basis, calculate the estimated market value of the company’s office portfolio at 12/31/2012.

9. Analysts estimate XYZ REIT’s P/FFO ratio should be 50 for this year. Is the current stock price at 12/31/2012 undervalued or overvalued?

10. Use the answer above and 1) assume the fair value of the company’s land held for sale approximates its costs, 2) ancillary business is valued at a 3 multiple of earnings and 3) the fair value of the company’s liabilities approximates their cost basis; what is the net asset value (NAV) per share at 12/31/2012?

Date: 2015-12-11; view: 1042