REIT Discounted Cash Flow valuation model, part two, unlevered cash flows. The next step is to calculate the free cash flows for the DCF. These are going to be unlevered because they are before any interest is considered. What I'm going to do here is I'm actually gonna hide these three columns so that they don't take up too much space on the screen. Now we have a five year operating model. For a DCF for REIT or real estate company, it is very common to see a 10 year model. In fact, anytime we're in a model that doesn't have stable cash flows by the end of year five, we typically wanna push it out to 10. So what we need to do here is actually push these cash flows out to year 6 through 10. We don't need to go in and rebuild the entire model. We simply need to forecast our drivers out. So I've got some assumptions out here in the outer years and we're going to apply them and build out the drivers. The first is the revenues and I'm going to use a growth rate times my previous year.

And again, I'm gonna copy as we go because we do have some changing assumptions and I don't want to copy over them by copying year 6 out to year 10. Next is the normalized operating expenses. That is a percentage of revenue.

Operating income is the revenue minus the normalized operating expense. And the operating margin, I'm gonna copy from the previous year because that calculation has already been done. And now I have a series of free cash flow items that are all driven off of revenue. So what I can do here is take the assumption times the revenue, and then I'm going to hit F4 twice. So I anchor the row. And now I can simply take this, copy this across, and I can take this entire row and copy it down to each item. And again, that's because it's taking the assumption from the row below and applying it to L50 which is the revenue, and that saves us a bit of time. Now I can actually calculate the unlevered free cash flow.

I just want to add up the items. I want to be careful to start with my EBIT. I don't need to go all the way to the top because I calculated EBIT off of my revenues and operating expenses and then add the other items using a comma.

I also need to go up to the top and copy over my normalized operating expenses and my operating income.

Copy that across.

And I'm going to add a little growth rate calculation here just for sanity check. Make sure that I'm not seeing any hockey sticks. There's a little bit of fluctuation because our assumptions move around a bit. That's not uncommon. As long as they're not jumping all over the place and we're not seeing trend lines way up or way down. Again, typically in a free cash flow calculation, we'll do a tax adjustment. However, again, because of the special tax status that REITs have, we don't need to do that here.