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Strategies & Market Trends : Value Investing
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To: Tapcon who wrote (33726)3/6/2009 10:08:13 PM
From: Spekulatius  Read Replies (2) of 78774
 
REITS - cheap by what metric? just because todays prices are much lower than the prices 2 month ago does not mean that prices are cheap.
Valuation based on NAV
Net asset value? Some brokerages estimate those. Reits nowadays trade at substantial discounts to those estimates. The problem is that there are no transactions that can validate those estimates. So we need to think a while what this means. In reality there is always a buyer for an asset like real estate, if the price is low enough. the fact that there are no transactions (which could support NAV) means that the spread between the Bid and Ask is too high. Why is it high - because the seller and the buyer disagree on the value of the properties. This is the same situation that happened when the housing boom ended - transaction volume dried. it is now accelerating (due to foreclosures) which is a sign of a bottom. the same thing seems to happen with commercial RE.

Valuation based on FFO.
The problem with that one is that it does not account for leverage. If the REIT still has cheap financing from old loans than the FFO can be pretty good until the debt needs to be rolled over. Once the debt get's rolled over the lender will only borrow up to a certain % of the NAV of the property. That can and will be a problem for many REIT's. Even in the best case, the cost of capital will sharply rise which is going to crimp FFO.

EBITDA/EV
The best valuation metric I have found is EBITDA/ EV. EV includes both equity value and the debt. it is a truly leverage adjusted metric and you will find that many REIT's you have listed that have cheap shares are heavily indebted and may even trade at premium to less leveraged REIT's in terms of that metric. My example for that is CLI and BDN both NE office REITs (similar geography) but CLI is much less leveraged. Based and EBITDA/EV CLI is cheaper than BDN.

The other thing to consider is that the Enterprise value of an entity like a REIT is layered. The top layer is the equity layer (value of the common stock), then comes the preferred, then comes unsecured debt and then comes secured debt.
if things go bad the equity layer is wiped out first, then comes the preferred, next unsecured debt and last secured (mortgaged debt). As an equity holder you need to be aware that everyone else in the soup chain get's to eat first before it's you turn.

So that's enough for now. I hope you don't mind my preaching. I believe based on the little I know that many REITs won't make it through this cycle without wiping the equity layer clean, or at least substantial dilution. I think that some of the REITs you mentioned are survivors (AVB, BXP and to a lesser extent SPG) but that does not mean that shareholders will prosper.
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