An overview of REIT valuation. The fact that REITs are a collection of mostly liquid assets means that they lend themselves well to valuation. However, as companies, they're very complex and subject to many variables, making the means to value REITs widely debated. As with valuing any corporate entity, there are two types of evaluation, intrinsic, where the company is valued based on its own fundamentals, irrespective of other companies, and relative, where the company's value is derived from comparing its performance, or the value of its assets, to other companies or assets. Intrinsic valuation methodologies are net asset value, or NAV, as well as discounted cash flow, or DCF. Relative methodologies are trading multiples, or looking at comparable companies trading in the equity markets to determine if our target company is fairly valued, or transaction multiples, in which we look at actual deals in the recent past to determine an appropriate value to pay for our target assets today. Included in relative valuations would be an examination of such metrics as price to AFFO, or AFFO yield. It should be said, that no valuation methodology should be chosen in a vacuum. All methodologies should be considered. When we value a traditional company, we are effectively valuing the net assets. For most companies, the net assets do not remotely reflect the value of a company for a couple of reasons. First of all, most assets in use in a traditional company do not have a liquid tradable value. They might have a salvage value, or a liquidation value, but the value of a traditional corporate is going to come from other sources such as brand, market share, management, strength, etc. With a REIT, however, there is generally a very liquid market for real estate, and therefore, the assets can be valued much more easily. Secondly, most assets in a traditional company lose value over time, as they are used to generate profits. In real estate, however, most assets increase in value. For this reason, the book value accounting approach of GAAP is much more of an impediment, less so for IFRS as we saw in an earlier portion of the module. Finally, it is important that REITs not be seen as just a collection of assets, but rather an asset focused corporation, where effective management is critical to high returns, earnings growth, and dividends. The total return on a REIT can be measured by its dividend yield and share capital growth. Traditional measures such as EPS or free cash flow are not as accurate. Competent management can use a combination of debt and equity, along with selecting high ROI investments to prevent dilution. For these metrics, AFFO and FFO can be used interchangeably, much like EBIT and EBITDA. However, AFFO is often seen as the pure value driver. The first metric is the AFFO or FFO payout, and this is one that is used most often by investors to determine the return on the REIT. Price to AFFO or FFO is very similar to PE ratio for REITs. It reflects how much you must pay to get a dollar of AFFO or FFO. If we invert this ratio, we get the AFFO yield. This is sometimes used as a proxy for the cost of equity. The higher price to AFFO, the lower the yield or cost of equity. This is because a high share price indicates a high value, and thus, lower compensation or return. The lower the multiple, the higher the yield, as the company is lower in value, and the risk to hold the equity is greater. Lastly, we look at total debt to market cap. Balance sheet management in a REIT is vital. Most REITs are leveraged between 30 and 60% of capital. While leverage is a cheaper source of financing than equity, as leverage increases, risk increases. The blend of debt or equity in a company will impact its cost of capital, or the rate at which it considers taking on new projects.