REIT Valuation Using Funds From Operations (FFO) and Adjusted Funds from Operations (AFFO)
Funds from Operation (FFO) FFO amends reported earnings and is a popular measure of the ongoing operating income of a REIT or REOC. It is calculated as follows: $$ {\begin{array}{l|r} \text{Accounting Net Earnings} & XX \\ \hline\text{Add: Depreciation expense}…
Net Value Per Share (NAVPS) in Publicly Traded Real Estate Securities Valuation
NAVPS refers to the (per-share) amount by which assets exceed liabilities. The amount is computed using current market values, as opposed to accounting book values, divided by the number of shares outstanding. NAVPS is generally considered the most appropriate…
Types of Publicly Traded Real Estate Securities
The primary type of REITs, the equity REITs, are keenly managed enterprises that seek to maximize returns from their property portfolios by applying management skills in operations and finance. Retail or Shopping Center REITs This class comprises shopping malls…
Basic Forms of Real Estate Investments
Real estate investments involve unique, heterogeneous assets in fragmented markets with infrequent transactions and high costs. Investments range from stable, income-producing properties (core real estate) to speculative, opportunistic investments (e.g., new developments, mezzanine debt, distressed situations). – Core: Stable…
Approaches in Valuing Real Estate
Valuation of Real Estate Properties Valuation of any commercial property is intrinsically valuable as it determines the worth of any particular real estate property. Income Valuation Approach In this scenario, a comparison is created where an investors’ acquisition price…
Financial Ratios Used to Analyze Real Estate Investments
Debt financiers often prefer debt service coverage ratio (DSCR) and loan to value (LTV) when arriving at the maximum loan on a definite property. $$ \text{DSCR} = \frac {\text{Year one NOI}}{\text{Debt service}} $$ Where: $$ \text{Debt service} = (\text{Interest}…
Portfolio Roles and Economic Value Determinants of Real Estate Investment
Economic Drivers The following economic factors affect the demand for major property types: GDP: This is by far the most important economic factor as it affects all property types. As the GDP grows, the demand for real estate investment…
Real Estate Investment Indexes
Private equity real estate investment indexes allow investors to analyze property investment performance using either appraisal-based or transaction-based index methods. To determine the best index method to employ, the investor needs to clearly understand the modalities of how the…
Due Diligence in Real Estate Investments
Real estate investment requires more extensive due diligence compared to public debt or equities due to its lack of transparency, standardization, and the significant impact of a property’s physical characteristics and location. Unlike other assets where investment decisions rely…
Direct Capitalization and Discounted Cash Flow Valuation Methods
Direct capitalization method, the stabilized net operating income (NOI) is divided by the market capitalization rate. In contrast, for the DCF method, the NOI for each year during the holding period plus the salvage value at the end of…
