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REIT valuations


beerbaron
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I'm browsing trough valuations of various sectors and it seems to me that all REIT are massively overvalued on a P/E, P/BV, FCF, etc... I understand the tax advantages but there must be something else, in Canada must REIT trade a 2xBV or more and 20 time earnings.

 

If I wanted to make a quick pass I would pool money and  buy lots of RE, make an IPO and check my investment double all of the sudden.

 

Can someone explain to me why REIT are so freaking expensive?

 

BeerBaron

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The two key metrics you may to check out are yield and P/FFO.  As these firms do not have to pay taxes they should have a value advantage over tax paying firms.  On whole they are in my opinion fully valued.  One exception is FUR who has bough properies via defaulted debt.

 

Packer

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The problem with P/FFO is that is neglects the depreciation of the assets. True, a building does not depreciate as fast as a software, but removing it completely is unrealisticly dangerous.

 

In my opinion, there are far better infrastructure plays. At much better prices.

 

BeerBaron

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In some/most cases the maintenance cap-ex is significantly less than the depreciation for buildings and other real estate assets.  You can argue removing it completly is not correct but the subtraction would be definately lower than the depreciation number and in most cases would be less than 50% of the depreciation depending upon the asset.  The depreciable lives are determined by accountants not what the economic life truly is.

 

Packer

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I'm browsing trough valuations of various sectors and it seems to me that all REIT are massively overvalued on a P/E, P/BV, FCF, etc... I understand the tax advantages but there must be something else, in Canada must REIT trade a 2xBV or more and 20 time earnings.

 

If I wanted to make a quick pass I would pool money and  buy lots of RE, make an IPO and check my investment double all of the sudden.

 

Can someone explain to me why REIT are so freaking expensive?

 

BeerBaron

 

Yield. If you manage a pension fund or anything that requires yield 5% on a REIT looks very good right now.

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  • 2 weeks later...

I agree with Myth. The REIT is simply a yield chase play by institutions. Not many options if you need current income.

I wouldn't buy most of them now, but they are priced a little better now than they were a couple years ago in the peak when comparing to spreads over 10 yr Treas.

 

BeerBaron: Valuation on REITs is all about Price to FFO (i.e Yield) or in private market Cap rates. Cap rates in private market have gone nuts over the last year and are back to 2006-07 levels for high quality assets. Class A properties in New York and Washington are trading in 5 Cap Range (Basically 5% unleveraged return or 20x earnings). So, basically the arbitrage between private and public isn't too much in most asset classes.

 

The problem with book value on Reits is that its based on historical cost (In US). If they mostly bought in 80-90's then book value should be 2-3x cost. If they bought in 2004-2007 most likely should be < 1x book. 

 

Other reasons institutional buyers are back for REIT's:

1. Many have de-levered and extended maturities. Avg US Reit is less than 50% LTV where private market real estate is closer to 80% LTV.

2. Allocating to REIT's vs Private Equity Real Estate. No 2/20 fees and liquid.

2. Occupancy levels are down from say 90-95 % to 80-85% range. Some upside in releasing space. Of coarse there is downside if rents keep going down.

3. Many view as inflation hedge, especially in the apartment sector

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  • 3 years later...

and here we are with Canadian reits trading below book value with 8% yields. BV is IFRS based that its basically audited market price value.

Interesting times, I am looking at a few REITS. US REITS are still at 20x earnings with Canadian reits below 10.

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"From a tax standpoint, we note the Canadian government withholds 15% of the dividends that these REITs pay to US investors, though you can recover this amount by filing a Form 1116 at tax time. Investors who hold these stocks in an IRA or other tax-advantaged account will not be able to recoup this withholding."

 

Is there any way around the withholding for IRA accounts?  Does this apply to all Canadian dividends or is it limited to REITs?

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  • 6 years later...

The two key metrics you may to check out are yield and P/FFO.  As these firms do not have to pay taxes they should have a value advantage over tax paying firms.  On whole they are in my opinion fully valued.  One exception is FUR who has bough properies via defaulted debt.

 

Packer

 

Hi Packer, when you say "yield", you're referring to Dividend yield, right? Because you could be talking about the yield at which the company/REIT is acquiring its buildings. One thing is the dividend yield, the other is the actual building yield (rent/total cost of the building). Is this correct?

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