Comparing Public REITs to Private Real Estate Funds

  • Article
  • Comparing Public REITs to Private Real Estate Funds
M-Asset

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.

Key Benefits
Description
Stability

Valuation and price discovery is less affected by short term, public market fluctuations.

Key Benefits
Description
Simplicity

Less complex vs public companies e.g. stock exchange listings, banker fees, regulatory compliance, etc.

Key Benefits
Description
Opportunity

Can 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.

Key Benefits
Description
Capital Formation

Raising 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.

Key Benefits
Description
Investment Community

Investment 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.

Key Benefits
Description
Access

Public 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.

Key Benefits
Description
Transparency

More regulatory oversight and third party scrutiny Independent information on underlying investments is also available.

Key Benefits
Description
Liquidity

Portfolio 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.

Values
Description
Replacement Costs

Private buyers focus on replacement costs with an emphasis on land values, development charges, zoning, etc.

Values
Description
Future Rent Growth

Private real estate investors incorporate long term rent growth estimates usually 10 years out, when determining future cash flows.

Values
Description
Future Value

Private 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.

Values
Description
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.

Values
Description
Net Asset Value

Cap rate assumptions, required capex, corporate overhead adjustments, operating expenses are considered when calculating NAVs.

Values
Description
Growth

Growth 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

A Series: MID 600

F Series: MID 601

Diversified Global
Real Estate
Medium
Middlefield Real Estate Split Corp. Split Share

A shares: RS

Preferred Shares: RS.PR.A

15-20 high
conviction REITs
Medium

 

 

Have Questions?

Whether you have specific investment inquiries or general questions about Middlefield, our team would be glad to help.

Contact Us

Disclaimer

This material has been prepared for informational purposes only without regard to any particular user’s investment objectives or financial situation. This communication constitutes neither a recommendation to enter into a particular transaction nor a representation that any product described herein is suitable or appropriate for you. Investment decisions should be made with guidance from a qualified professional. The opinions contained in this report are solely those of Middlefield Limited (“ML”) and are subject to change without notice. ML makes every effort to ensure that the information has been derived from sources believed to reliable, but we cannot represent that they are complete or accurate. However, ML assumes no responsibility for any losses or damages, whether direct or indirect which arise from the use of this information. ML is under no obligation to update the information contained herein. This document is not to be construed as a solicitation, recommendation or offer to buy or sell any security, financial product or instrument.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund and ETF investments. Please read the prospectus and publicly filed documents before investing. Mutual funds and ETFs are not guaranteed, their values change frequently, and past performance may not be repeated. You will usually pay brokerage fees to your dealer if you purchase or sell shares of an investment fund on the Toronto Stock Exchange or alternative Canadian trading platform (an “exchange”). If the shares are purchased or sold on an exchange, investors may pay more than the current net asset value when buying shares of the investment fund and may receive less than the current net asset value when selling them. There are ongoing fees and expenses associated with owning shares of an investment fund. An investment fund must prepare disclosure documents that contain key information about the fund. You can find more detailed information about the fund in the public filings available at www.sedar.com. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated.

Certain statements in this document may be viewed as forward-looking statements. Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, intentions, projections, objectives, assumptions or future events or performance (often, but not always, using words or phrases such as “expects”, “is expected”, “anticipates”, “plans”, “estimates” or “intends” (or negative or grammatical variations thereof), or stating that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved) are not statements of historical fact and may be forward-looking statements.

Forward-looking statements are subject to a variety of risks and uncertainties which could cause actual events or results to differ from those reflected in the forward-looking statements including as a result of changes in the general economic and political environment, changes in applicable legislation, and the performance of each fund. There are no assurances the funds can fulfill such forward-looking statements and the funds do not undertake any obligation to update such statements. Such forward-looking statements are only predictions; actual events or results may differ materially as a result of risks facing one or more of the funds, many of which are beyond the control of the funds.

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  • Comparing Public REITs to Private Real Estate Funds
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