We will now look at other REIT valuation methodologies, comparables analysis. Previously, we looked at net asset value as an example of an intrinsic valuation methodology. Trading and transaction comparables are both examples of relative valuation methodologies. With trading comparables, we are examining the prices at which other similar companies are trading at in the equity market relative to their earnings and then comparing them to our target company. For transaction comparables, we are looking at the prices paid in an acquisition for other similar companies relative to their earnings and comparing them to our target. Trading comparables can be run at any point in time as long as the companies in the comparable set are all trading actively in the public market. Transaction comparables are most relevant when there is significant M&A activity in the sector or else the data will not be meaningful. The most significant difference between trading and transaction comparables is that trading multiples reflect the value of purchasing a non-controlling stake in the company while transaction multiples reflect the price at which control is acquired. As you can imagine, there's a significant premium over the trading value to gain control in a company. Comparables work the same with REITs as other industries. First, we identify the comp set, and this is done by size, by sector, by lease type, et cetera. Secondly, we pull the data from the financials, the financials being annual reports, 10Ks and Qs in the US, and the interim financials if available in non-US companies, and we scrub, scrub, scrub, and this means that we clean the earnings, we clean the figures of all irregularity so that the companies can be properly compared across the comp set. In addition, we will also need forecast earnings or earnings estimates for the comp set. This particular methodology works most efficiently when we are valuing the company on a forward basis. Third, we need to identify any outliers in the comp set and remove them. Fourth, we will analyze for trends and drivers, and by drivers, I'm talking about the underlying earnings or revenue figures that seem to be most consistent in driving the value of the comp set. In the tech world, revenues or clicks or downloads might be a driver. In traditional retail and industrial sectors, EBIT, EBITDA or EPS is generally a driver. For REITs, as we will see, there are other metrics that are more widely used and tend to drive the value of the shares in trading. After we have identified the driver, we can choose the multiple that incorporates that driver and apply it to the earnings, revenue, et cetera, of our target company to find the implied share price. This is an example of a trading comparables table that you might be responsible for compiling an investment banking or equity research setting. These are trading comps as evidenced by the share price column to the left. If they were transaction comps, you would see a purchase price column. Now, not showing here are the raw data columns that would be a part of this and those would have the data that go into these calculations, such as the actual and projected AFFO, FFO, EBITDA, et cetera. Now with REITs, more emphasis is placed on FFO and AFFO as drivers than EBITDA or net income. This comps data was compiled a few years back, but as you can see, we are most interested in the forward multiples, meaning that the drivers or earnings are forecast or expected amount. Also, the cap rate here is a portfolio cap rate, meaning that it is implied based on the total real estate assets in the forward operating income from those assets.
