1 Funds from Operations FFO Approach The Funds from Operations FFO is a

1 funds from operations ffo approach the funds from

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1. Funds from Operations (FFO) Approach The Funds from Operations (FFO) is a commonly used metric for the valuation of REITs. FFO is calculated as follows: Net income computed in accordance with GAAP + Depreciation on real estate + One-time losses on real estate – One-time gains on real estate = Funds from Operations (FFO) This figure approximated the cash flows from operations. However, one weakness with this measure was that it did not adjust for capital expenditures used to maintain the existing portfolio of properties. As such, FFO did not reflect the true residual cash flows since all expenditures have not been accounted for. The Adjusted-Funds from Operations (AFFO) metric, which deducts capital expenditures for property maintenance from FFO, overcomes the deficiency. Analysts focus on AFFO because it was a better measure of residual cash flows to shareholders and provided a better base number for the estimation of value. These metrics can be used for valuation through Discounted Cash Flow (DCF) as well as in relative valuation methods. • Discounted Cash Flows (DCF). Project the expected stream of AFFO based on growth estimates and discount the cash flows at an appropriate discount rate to determine the present value. The cost of equity capital is typically used for discounting FFO and AFFO cash flows. • AFFO multiple = price/AFFO (benchmarked against industry peers).Other relative measures of valuation were also widely used in practice. A primary weakness of the AFFO approach was that it did not incorporate property appreciation or depre- ciation. In periods of falling property values, separating depreciation from the analysis could inflate REIT shares and hide risks posed to investors as a result of falling prices. 2. Net Asset Value (NAV) Approach Most analysts use the Net Asset Value (NAV) as a metric for the valuation of REITs. This was calculated as the market value of the assets of a REIT minus the value of all liabilities and divided by the number of units outstanding. The value of the real estate assets was generally calculated by taking the REIT’s forward Net Operating Income (NOI) and dividing it by an appropriate capitalization rate.Then other assets were added to arrive at the market value of assets. A REIT can trade at or below/above NAV; however, in the long run the average discount/premium to NAV for the market has been roughly 0 per cent. The NAV per share is a widely used metric to assess the value of a REIT. Source: Authors’ research.
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Seyyed et al. 145 Exhibit 4. Forecast Assumptions Income statement assumptions Mall Total Built area 1,3M June 2016 June 2017 June 2018 June 2019 June 2020 Leasable area (sqf) 0.56 M 0.56 M 0.56 M 0.56 M 0.56 M Occupancy rate 94 per cent 97 per cent 97 per cent 97 per cent 97 per cent Leased out area (sqf) 0.53 M 0.54 M 0.54 M 0.54 M 0.54 M Avg rent (sqf) 3,150 3,465 3,811 4,192 4,612 per cent increase 10 per cent 10 per cent 10 per cent 10 per cent Office Tower Total Built area 0.3M June 2016 June 2017 June 2018 June 2019 June 2020 Leasable area (sqf) 0.25 M 0.25 M 0.25 M 0.25 M 0.25 M Occupancy rate 100 per cent 100 per cent 100 per cent 100 per cent 100 per cent
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