Index
Private Real Estate Funds
Private Real Estate valuations are typically less volatile since they are normally based on the intrinsic value of the properties they hold and valuations are struck more infrequently than their public counterparts i.e. usually quarterly. Private Real Estate funds, especially those vehicles which are smaller in size with less sophisticated investors, are not subject to as much regulation and compliance and operate with fewer costs. This results in, however, higher risk associated with Private Real Estate as there is less regulatory oversight and public scrutiny.
StabilityValuation and price discovery is less affected by short term, public market fluctuations.
SimplicityLess complex vs public companies e.g. stock exchange listings, banker fees, regulatory compliance, etc.
OpportunityCan be more flexible in targeting potential investment opportunities.
Public REITs
Public REITs are ideal for real estate investors who want regular and easy access to their capital and are seeking to benefit from the regulatory oversight applied to public companies. In addition, regulatory bodies and large institutional investors often impose a higher standard of compliance on public companies, resulting in greater disclosure and the incorporation of best practices in compliance and ESG principles. Moreover, public market volatility due to macroeconomic or geopolitical factors can often result unit prices which are disconnected from company fundamentals. As active managers, Middlefield is able to capitalize on opportunities where trading prices do not reflect intrinsic values.
Capital FormationRaising equity and debt capital is much more efficient in the public vs the private markets. REITs often complete large, overnight bought deal financings, providing them a competitive advantage to fund acquisitions.
Investment CommunityInvestment research analysts scrutinize over and regularly publish opinions on quantitative and qualitative information disclosed by public REITs This provides investors with a valuable and independent source of information to make more informed investment decisions.
AccessPublic REITs are distributed by way of prospectus and suitable for a wide range of investors and investment sizes e g investors are not subject to eligibility requirements, minimums or upfront costs.
TransparencyMore regulatory oversight and third party scrutiny Independent information on underlying investments is also available.
LiquidityPortfolio companies are publicly listed and highly liquid i e units can be bought and sold at any time.
Summary
Both Public REITs and Private Real Estate are tax efficient investments that provide investors exposure to a diversified portfolio of income producing properties.
Similarities and Differences Between Private Real Estate and Public REIT Valuations
There are three core approaches to valuing real estate: income capitalization, cost-based approach and comparable sales. Public REITs are subject to IFRS accounting standards and are required to disclose detailed financial information on a quarterly basis. This information is transparent and scrutinized by analysts, asset managers and institutions. As a result, these approaches are widely used by analysts and investors to derive public REIT values. In contrast, financial information is more difficult to obtain for private real estate investments. Private real estate funds often establish a valuation policy to determine asset values that are periodically audited by an arms-length third party. Private investors must rely more heavily on the sales of comparable properties and the estimated costs of replacing assets to value existing properties.
Private Real Estate
How Value is Determined
Private real estate is often valued based on appraisals, replacement costs and comparable market transactions. Private real estate investors often have long time horizons and emphasize the Internal Rate of Return (IRR) of an asset to determine its relative value. This calculation involves assumptions for up-front costs, cash flows over the life of the investment and terminal a value of the asset.
Replacement CostsPrivate buyers focus on replacement costs with an emphasis on land values, development charges, zoning, etc.
Future Rent GrowthPrivate real estate investors incorporate long term rent growth estimates usually 10 years out, when determining future cash flows.
Future ValuePrivate investors do consider, but often place less emphasis on, projected appraisal value of properties if they were to be sold in the future.
Public REITs
How Value is Determined
Public REITs primarily own income-producing properties. They are valued using a detailed analysis of rental income and expenses to determine net operating income (NOI). Once expected NOI is determined, property values can be assessed using a capitalization rate to represent the income yield of a property or portfolio.
Funds From Operations (FFO)FFO represents a key input in modelling fair market value estimates FFO estimates usually look out 2 to 3 years Publicly traded REITs are often valued on a multiple of FFO, similar to P/E or EBITDA multiples.
Net Asset ValueCap rate assumptions, required capex, corporate overhead adjustments, operating expenses are considered when calculating NAVs.
GrowthGrowth assumptions for future rent increases, occupancy gains and potential acquisitions based on macro economic forecasts to supplement core FFO and/or NAV based valuation methodologies.
Middlefield’s Real Estate Solutions
Middlefield’s real estate strategies are designed for investors seeking income and growth from a portfolio of large-cap companies diversified across the global real estate sector. Middlefield’s history in real estate began when the firm was founded over 40 years ago and we have been managing dedicated REIT strategies for over 10 years. Our solutions provide Canadian investors with global exposure to a sector that has attractive defensive and inflation-protection attributes. Middlefield’s real estate funds have won multiple awards in the real estate sector.
| Strategy | Fund Structure | Ticker/Fund Code | Investment Focus | Risk Rating |
|---|---|---|---|---|
| Middlefield Real Estate Dividend ETF | ETF | TSX: MREL | Diversified Global Real Estate |
Medium |
| Middlefield Real Estate Dividend Class | Mutual Fund |
F Series: MID 601 |
Diversified Global Real Estate |
Medium |
| Middlefield Real Estate Split Corp. | Split Share |
Preferred Shares: RS.PR.A |
15-20 high conviction REITs |
Medium |
