# REIT valuations



## Cal (Jun 17, 2009)

Just curious as to how some of you personally value/price some of the REITs?

I know that their value can go up and down (value of property, land, buildings) with the RE markets, and that the value can also go up and down in regards to the REITs ability to produce positive cash flow (leased property, quality of tenants/leases, profits).

I was just interested to see which factors mattered out there to investors. Hey, maybe some of you just look at the dividend provided and don't even analyze the other factors, which could be a rather nearsighted approach.


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## Dana (Nov 17, 2009)

I think there are several factors to consider. The type of property (residential, commericial, apartments, retail), the distribution history, the location of the holdings and the market in that location (vacancy rates) and if you are considering commercial/retail REITs the economic outlook for the industries involved.


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## furgy (Apr 20, 2009)

I invest almost solely in REIT's now , the first thing I look at is the payout and their distribution history , I like the ones that pay a good distribution and have maintained that distribution over over the years.

I have found small cap REITs generally have the highest payouts and are therefore the most profitable (capital gains aside) , the larger ones tend to pay more to their principals and management companies , leaving less for the unitholders.

You have to watch as some of them resort to some questionable practices (especially the larger ones) to attract investors , such as Calloway and Primaris who recently doubled their distributions when unit prices were low , it just isn't sustainable.

If you had invested in either of those in the last few months , based on payout , you would now be a little choked that they have cut their distributions in half again now that unit price is up.

If a REIT I am invested in cuts its distribution too much , I sell quickly on the news , as share price usually begins to drop right afterwards.

I avoid healthcare or hotel REITs right now as most will not qualify for REIT status in 2011 , and may see declining unit prices due to the masses wanting out before the conversion date.

Some REITs offer a 3% or so incentive if you enroll in their DRIP , these ones I DRIP and the ones that offer no incentive , I take the cash and re-invest it where I want.

So far my strategy is paying me very well , I am averaging over 16% return , and unit prices of most of my REITs are way up from a few months ago when I loaded up at all time lows.


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## canehdianman (Apr 7, 2009)

furgy said:


> I invest almost solely in REIT's now , the first thing I look at is the payout and their distribution history , I like the ones that pay a good distribution and have maintained that distribution over over the years.
> 
> I have found small cap REITs generally have the highest payouts and are therefore the most profitable (capital gains aside) , the larger ones tend to pay more to their principals and management companies , leaving less for the unitholders.
> 
> ...


I'm not sure where you got your information, but Calloway's distribution has remained unchanged since August 2007.


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## furgy (Apr 20, 2009)

canehdianman said:


> I'm not sure where you got your information, but Calloway's distribution has remained unchanged since August 2007.


You're right , I don't own it and never have , I was going by the chart at google finance , guess it just goes to show they aren't very good at getting their information correct.

here it is http://www.google.ca/finance?q=TSE:CWT.UN

According to google they have adjusted their distributions three times in the last 6 months , but going by the actual news releases , they have remained the same.


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## canehdianman (Apr 7, 2009)

Yeah, I've noticed google finance frequently gets distributions and dividends wrong. It seems to combine two months worth together sometimes, and skips a payment other times.


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## ssimps (Dec 8, 2009)

What about something like the XRE ETF; would this be a good way to get into REITs without single stock exposure, even given the current ETF price?


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## FrugalTrader (Oct 13, 2008)

The problem with XRE is that it's highly concentrated in the top 5 REITs. For the price of the MER, it may be better off to buy the stocks individually.


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## FrugalTrader (Oct 13, 2008)

furgy said:


> I invest almost solely in REIT's now , the first thing I look at is the payout and their distribution history , I like the ones that pay a good distribution and have maintained that distribution over over the years.
> 
> I have found small cap REITs generally have the highest payouts and are therefore the most profitable (capital gains aside) , the larger ones tend to pay more to their principals and management companies , leaving less for the unitholders.
> 
> ...


Which small cap REITs do you like best?


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## ssimps (Dec 8, 2009)

FrugalTrader said:


> The problem with XRE is that it's highly concentrated in the top 5 REITs. For the price of the MER, it may be better off to buy the stocks individually.


Fair point, but do you think at todays prices to buy these stocks it is a good idea or did I miss the boat on this sector?


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## FrugalTrader (Oct 13, 2008)

ssimps said:


> Fair point, but do you think at todays prices to buy these stocks it is a good idea or did I miss the boat on this sector?


In my opinion, the big REITs are a bit rich for my blood at the moment.


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## HaroldCrump (Jun 10, 2009)

FrugalTrader said:


> In my opinion, the big REITs are a bit rich for my blood at the moment.


Yep, and so is almost anything these days, at least on the TSX.
I think a lot of people are waiting for a correction....


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## leslie (May 25, 2009)

To get back to the OP question:

I analyse the company the same way I do any other business. Distributions are irrelevant. Only total return matters.

I restate the Income Statement reducing depreciation in half. Not long ago 2% depreciation was the norm. It was changed to 4% after that long spell of flat RE markets when accountants started finding that RE transactions were resulting in write-off on the building (i.e. the existing rate of depreciation was not covering the actual degradation). But I believe the old rate was actually a better estimate of economic degradation. Certainly in Vancouver, building do not retain value. It is only the land that goes up in value.

I calculate the operating rate of return on the capitalized costs of the properties, with and without including depreciation, before tax and interest and capital gains. 

I compare that rate with the average rate being paid for debt (some disclose this in the notes, for others you have to add up all their individual debts) and to the current rates the company faces in today's tight funding market. This is where I often walk away. Leverage has a negative effect as well as positive one. 

I evaluate growth by calculating the Revenues per square-foot. This is frequently amazingly low.

I evaluate growth in what I own with sq/ft-per-unit. Again most companies are growing by issuing more units without growing your own share's value.

I evaluate the capitalized cost of RE by calc its per sq-ft value. The newspapers report RE transactions once a week and you can find out the average per-sq-ft value from there. I have never really found much difference. There is enough turn-over of properties that the book values don't seem to get much out of what with market values.


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## ssimps (Dec 8, 2009)

leslie said:


> To get back to the OP question:
> ....


So to summarize, do you think XRE and / or the top 5 holdings are currently over / under / or fairly valued based on current prices?  Or is that too simple a question for something that it too complicated?

Thank you.


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## leslie (May 25, 2009)

Yup. What valuation metric you think is appropriate depends on your analysis of the company and how you personally trade off the good points with the bad points. A valuation metric says nothing about the company itself. I make my decisions using fundamental analysis.

The following is an excerpt from a spreadsheet I use for downloaded financial data. The most important section is the first. 
* Notice how much Riocan depends on new shares being issued. 
* Notice that the dividends are greater than the NetIncome with Depreciation reversed out. 
* Notice how 5-yr book value and EPS per share is declining
* In the 5yr growth section see how the value of ppty is growing at about the same rate as revenues, so the depreciation being booked may well be quite appropriate to the economic wearing out.


That leaves the investor with essentially no growth and only the distribution. For decades this company yielded 10%. The increase in the stock price is really due to the market's decision to require a lower return. Even for RE, I want a greater return than 6%.


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## ssimps (Dec 8, 2009)

leslie said:


> Yup. What valuation metric you think is appropriate depends on your analysis of the company and how you personally trade off the good points with the bad points. A valuation metric says nothing about the company itself. I make my decisions using fundamental analysis.
> 
> The following is an excerpt from a spreadsheet I use for downloaded financial data.


Thanks leslie, this I can understand and agree with. It also seems to back other posters comments. i.e. this area is over valued.


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## leslie (May 25, 2009)

No, no no. The point was NOT that I think it over/under valued. The point is that you have make your own evaluation of every single company. And decide your OWN tradeoffs. When asking opinions, ignore the conclusions, and listen and evaluate the reasons given.


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## HaroldCrump (Jun 10, 2009)

Awesome, leslie.
Are you able to share the spreadsheet template that you used?
You may remove the numbers in case you don't wanna give away your analysis for free.

Thanks


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## ssimps (Dec 8, 2009)

leslie said:


> No, no no. The point was NOT that I think it over/under valued. The point is that you have make your own evaluation of every single company. And decide your OWN tradeoffs. When asking opinions, ignore the conclusions, and listen and evaluate the reasons given.


OK, sorry, I should have said that based on your sheet I (ssimps) think they are. 

BTW, I don't think my reply suggested you (leslie) "think it over/under valued". I was agreeing with the fundamental issues you raised above the sheet.


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## ssimps (Dec 8, 2009)

HaroldCrump said:


> Awesome, leslie.
> Are you able to share the spreadsheet template that you used?
> Thanks


Agree with awesome and am also wondering if you could share your eval sheet?


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## Cal (Jun 17, 2009)

Thanks for the time and effort in your posts leslie. Much appreciated.

I have to wonder how much the REIT market has been affected(increase in price) by baby boomer aged people who got burnt on the market collapse, looking for a steady income streams in retirement.


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## leslie (May 25, 2009)

Downloading data takes a lot of fiddling because the data IS NOT CORRECT as stands. 
Template

The copy of my Riocan :
spreadsheet


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## ssimps (Dec 8, 2009)

leslie said:


> Downloading data takes a lot of fiddling because the data IS NOT CORRECT as stands.


What do you mean by your above comment?

Thanks leslie for your continued help and advise.


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## leslie (May 25, 2009)

Issues are noted on the opening page. Plus some data is just wrong.


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## Cal (Jun 17, 2009)

http://www.milliondollarjourney.com/reit-analysis-using-funds-from-operations-ffo-affo.htm

http://www.thickenmywallet.com/blog...trusts-have-a-dividend-payout-ratio-over-100/

Found these articles interesting on the REIT topic of valuation.


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## Four Pillars (Apr 5, 2009)

Fabrice Taylor wrote a pretty interesting piece on REITs yesterday.

https://secure.globeadvisor.com/servlet/ArticleNews/story/gam/20100617/VOX17ATL


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