Tuesday, November 9, 2010

Legacy REIT

In our corporate finance class today, we were responsible for presenting our valuation of the Legacy REIT IPO. We used a variety of different valuation methods and multiples to provide a range of potential valuations before recommending a price of $10.50.

My team was fantastic to work with. As we are also responsible for the RioCan valuation next week, we opted to split the group work down the middle and sort out our presentation. My team mates produced a robust DCF model which had it's assumptions firmly grounded in the economic realities of the industry. When it came to question and answers, my team mates were resilient in answering questions about reconciling the various valuation methods to resolve model tensions (the DCF says we should price higher, but yield analysis shows that we aren't generating a high enough yield to attract potential investors relative to other REITs).

In the end, it took all the strength I could muster to stop grinning like a Cheshire Cat as my team mates hammered back answers to questions by pulling up pre-emptive appendix slides and presenting a well founded case for our valuation.

As an interesting note, our professor had worked on this deal and mentioned that they had priced the deal at $10 (and that apparently, for mathematical simplicity, these units are generally priced at $10 and that the sources of funds are changed through the number of units issued - like bonds at $1000 or preferreds at $25).


qmarks said...

dude I am telling you again EV to FFO is wrong! FFO is after interest but EV is debt + equity. It should be Price to FFO

Joshua Wong said...

Good catch. We were called on this during our presentation. However, we noticed that there were various definitions of FFO in both our text and the internet.

We opted to take a definition of FFO that included both debt holders and equity holders and therefore needed to match the stakeholders in the numerator (value) with the denominator (earnings).