Amb Case Solution

1. Do you believe that EPS, FFO, or NAV is the most appropriate metric for valuing a REIT? What do you see as the benefits and drawbacks of each measure?

Because these metrics have different definitions between non-GAAP and GAAP standards, when entering into public capital markets, they are required to be converted into GAAP standards. As a result, this situation makes it “difficult to evaluate the real operating performance of REITs and compare those results across periods”.  

Because such industry-specific metrics were not consistently calculated, it was difficult for users of REIT financial statements to compare operating results. According to Moghadam, when companies utilize these financial terms, they don’t give a specific definition about these terms and won’t state this action to the public.

EPS

Pro：Rules are clear and are policed by the accounting profession, which benefits maintain a good investor relationships.

FFO:

Pro: an alternative to GAAP net income specifically for the REIT industry and can reflect the true operating performance of REITs

Con: as there is no common definition about FFO, which means that FFO was not applied consistently across the industry, executives use the numbers that they use to calculate FFO, such as whether or not adding back depreciation, including gains on the sale of depreciated property and including property maintenance costs.

NAV:

Pro: “REITs were fundamentally a collection of real estate assets and should be approach on a ‘sum of the parts’ basis, using NOI and divided it by a factor known as cap rate (a risk-adjusted rate of return on-and-of capital that took into account such factors as property type, location, quality and age, and expected demand growth.” It can also help REIT managers to create a floor under the stock price.”

Con: “it was a backward-looking calculation, which failed to take into account management’s ability to create future value by trading and developing properties. Also, valuations could be misleading at extreme ends of the economic cycle or when capitalization rates deviated substantially from historic averages. In addition, some REIT managers said that NAV created an anchor to the share price.”