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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)
| December 31, 2012 | ||
| Assets | ||
| Real Estate related investments: | ||
| Retail properties | ||
| Land | 227,620 | |
| Building improvements | 1,251,911 | |
| Furniture, fixtures and equipment | 37,937 | |
| Accumulated depreciation | -211,187 | |
| Total retail properties | 1,306,281 | |
| Land available for sale | 1,467 | |
| Total real estate assets | 1,307,748 | |
| Intangible assets, net | 81,800 | |
| Cash and cash equivalents | 4,474 | |
| Total assets | 1,394,022 | |
| Liabilities | ||
| Notes payable | 848,324 | |
| Accounts payable and other liabilities | 72,659 | |
| Total liabilities | 920,983 | |
| Equity | ||
| Stockholders' Equity | ||
| 6.50% Series D Preferred stock, ($0.001 par value, | ||
| 2 million shares authorized, issued and | ||
| outstanding $25 liquidation value) | ||
| Common stock, $0.001 par value, 67.6 million | ||
| share authorized and 16 million shares | ||
| issued and outstanding at 12/31/2012 | ||
| Additional Paid-in capital | 539,457 | |
| Retained earning (deficit) | -66,436 | |
| Total stockholders' equity | 473,039 | |
| Total Liabilities and stockholders' equity | 1,394,022 |
XYZ Retail REIT
Consolidated Statement of Income
(In thousands, except per share data)
| Three months ended | ||
| December 31, 2012 | ||
| Revenues | ||
| Revenues from retail properties | 57,547 | |
| Management company income, net | ||
| Total revenues | 57,794 | |
| Expenses | ||
| Property operating expense | 26,363 | |
| Depreciation - Real Estate | 19,790 | |
| General and administrative | 1,246 | |
| Total expenses | 47,399 | |
| Other income and expenses | ||
| Interest and other income | ||
| Gain on sale of real estate | 4,181 | |
| Interest expense | -12,845 | |
| Income prior to preferred dividends | 1,737 | |
| Dividends on preferred stock | -813 | |
| Net income available to common stockholders | ||
| Net income per common share | 0.06 | |
| Dividends per common share | 0.65 | |
| Weighted average common shares outstanding - diluted | 14,500 | |
| Common shares outstanding at 12/31/2012 - diluted | 16,000 | |
| Supplemental data for the quarter unless otherwise noted: | ||
| Recurring capital expenditures - no seasonality | 1,895 | |
| straight-line rents in excess of cash rental payments | 1,345 | |
| Loan principal payments | 4,020 | |
| Projected same store NOI growth for 2012 | 3.00% | |
| Percentage of assets in suburban locations | 70% | |
| Percent of 4th quarter assets in the same store pool | 100% | |
| Stock price at 12/31/2012 | 51.00 | |
| Average current economic cap rate for the portfolio | 7.00% | |
| Capital structure target: | ||
| Debt | 47% | |
| Preferred stock | 3% | |
| Common equity | 50% |
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 4th quarter?
5. Calculate the debt / market-cap ratio for the 4th quarter?
6. Calculate the Interest-Coverage Ratios for the 4th quarter?
7. What was the property Net Operating Income (NOI) for the 4th 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: 1350
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