Analysing REITS

hi i have a question regarding REIT valuation,

when we use DDM, projecting their income available for distribution and discounting them to present value, do we still need to subtract the total present value with net debt?

i found reports from CIMB, OSK, etc. dont subtract the net debt anymore...

thx

(30-10-2014, 10:05 AM)rickytj Wrote: hi i have a question regarding REIT valuation,

when we use DDM, projecting their income available for distribution and discounting them to present value, do we still need to subtract the total present value with net debt?

i found reports from CIMB, OSK, etc. dont subtract the net debt anymore...

thx

Do not subtract the net debt is the correct procedure.

(30-10-2014, 03:35 PM)Boon Wrote:

(30-10-2014, 10:05 AM)rickytj Wrote: hi i have a question regarding REIT valuation,

when we use DDM, projecting their income available for distribution and discounting them to present value, do we still need to subtract the total present value with net debt?

i found reports from CIMB, OSK, etc. dont subtract the net debt anymore...

thx

Do not subtract the net debt is the correct procedure.

Yes but then again if we don't substract the PV with net debt, are we assuming the company won't pay back the debts?

I understand when we use DDM for non-REIT equities, we dont have to subtract the PV with net debt because we assume shareholders only receive dividend after the company pays back its interest and principal.... but for REIT, they usually distribute 90% of income as dividends (hence very little retained earnings), so if we discount all these future dividends to their PV but we don't subtract with net debt, are we assuming the company won't need to repay the principal??

Well, most valuation companies have a vested interest in reporting a higher valuation. Although they do not subtract net debt, we can always do it on our own to get a more conservative estimate.

(12-12-2014, 10:04 AM)zerobeta Wrote:

(30-10-2014, 03:35 PM)Boon Wrote:

(30-10-2014, 10:05 AM)rickytj Wrote: hi i have a question regarding REIT valuation,

when we use DDM, projecting their income available for distribution and discounting them to present value, do we still need to subtract the total present value with net debt?

i found reports from CIMB, OSK, etc. dont subtract the net debt anymore...

thx

Do not subtract the net debt is the correct procedure.

Yes but then again if we don't substract the PV with net debt, are we assuming the company won't pay back the debts?

I understand when we use DDM for non-REIT equities, we dont have to subtract the PV with net debt because we assume shareholders only receive dividend after the company pays back its interest and principal.... but for REIT, they usually distribute 90% of income as dividends (hence very little retained earnings), so if we discount all these future dividends to their PV but we don't subtract with net debt, are we assuming the company won't need to repay the principal??

The DDM is a method of valuing a company's share price based on the basic concept that its share price is simply the sum of all of its future dividend payments, discounted back to their present value.

Please note that the concept of perpetuity is also being assumed or used in the DDM.

In the context of a company (be it Reit or non-Reit) with perpetual life, which pays dividends regularly :
It could be debt free all the times.
It could be debt free some of times.
It could have debt some of the times.
It could have debt all the times – i.e. perpetually.

There is no implicit or explicit assumption, under the DDM valuation method, on the debt level of a company – its share price is simply the PV of future dividends.

Hence, to apply the concept of DDM consistently in the share price valuation of a company (Reit or non-Reit), net debt should not be deducted from the PV - to deduct net debt from the PV is conceptually inconsistency.

Company A :
Number of shares = 500 million
DPS = 5 cents, perpetually
Net Debt = zero

Company B :
Number of shares = 1,000 million
DPS = 5 cents, perpetually
Net Debt = 300 million or 30 cents per share

Assuming discount rate = 7%

Under DDM,
Value (A) = Value (B) = PV = 5 / 0.07 = 71 cents

If net debt were to be deducted:
Value (A) = 71 cents
Value (B) = 71 – 30 = 41 cents

There is no 100% correct answer to each valuation method. If the valuation result make sense to you, then use it.


“It is better to be roughly right than precisely wrong.”
― John Maynard Keynes

http://blogs.cfainstitute.org/investor/2...arratives/

Here is a good article on valuation. I like the first point where it states one should "survey the landscape". This is important becauses it acts as a narrative to back our growth assumptions figures in valuation

To be frank, I doubt if most of us will hold a REIT for as long as 20-30 years.

A simple way to do this relatively conservatively (for REITs only) is: (A) decide if the income from a reit is likely to stay the same or grow in the next 5 years. (B) Assume that the current dividend income accounts for all of your returns. © ask yourself if the current dividend yield is acceptable against your target return for a medium risk investment against your alternative investments. (D) reevaluate every 6 months or when the share price changes significantly.

If you really want to use DDM (even if just as one factor in your decision), then I suggest one simple possibility : use a discount rate that reflects the assumed credit risk of the cashflows over the long term. You can use the commercial rates that the REIT gets from its banks as a start (assuming bankers have better information). e.g. The REIT borrows 5% for 3 years and the risk free bond yield (at 3y) is 1%. The spread is 4%. Then add this spread to the 30y SGS bond yield (currently 3.38%) to get 7.38%. Add 1% to account for junior status of the "debt" (since bank loans have to be paid first). Use this rate 8.38% for discounting.

Also, please remember that most people are expecting interest rates to rise over the next few years.

No need analyse so much, just wait for whichever property segment the REIT is in to have downturn, the REIT to drop in price, yield to be high, discount to NAV increase and gearing to be low.

When things are going well the REIT will gear up, increase DPS and catch up or exceed the NAV. Then just sell off and rinse and repeat.

(13-12-2014, 06:06 PM)Ray168 Wrote: There is no 100% correct answer to each valuation method. If the valuation result make sense to you, then use it.


“It is better to be roughly right than precisely wrong.”
― John Maynard Keynes

Agreed - there is no 100% correct answers to each valuation method.

But, could a valuation result make sense when the underlying principle or concept of the valuation doesn’t make sense?

Agreed -“It is better to be roughly right than precisely wrong.”

But, how to increase the odds of ended up being roughly right rather than precisely wrong?

By subtracting net debt from PV (using DDM), is it going to make the valuation result closer to being “roughly right “ or closer to being “precisely wrong” ? That is the question !