Intrinsic Valuation of REITs

Abstract

This thesis investigates, models and presents the financial health and financial positions of the South African real estate investment trusts (from here, REITs). In order to address that investigation, this thesis is anchored on three essays-(i) dynamic cash flows, (ii) bankruptcy prediction and (iii) smart betas. The first study (i.e. chapter 3) uses different discounted cash flows (DFCs, hereafter) to determine values of REITs and those DCFs are anchored by the organisational capital structure. The second study (i.e. chapter 4) is shaped on Altman (1968) for predicting bankruptcy. Altman (1968) is one of the earliest studies that explored corporate bankruptcy. The third study (i.e. chapter 5) presents smart beta strategies, based on qualitative and quantitative betas. The first study confirms that the value of REITs, as measured by DCFs, is sensitive to the capital structure. The second study illustrates that bankruptcy is well accounted for, when using probabilistic and multilinear models. Notably, the second study accurately predicted the default of the Rebosis Property Fund in 2022 based on 2014-2018 time series, using different selected macroeconomic variables. A 5-year accurate prediction in any sector of capital markets is unheard of! The third study exemplifies that qualitative betas better measure the quality of management, while quantitative betas appropriately detect financial health and financial position of REITs. The implications of this study are as follows. First, depending on the type-funding injected by investors, appropriate DCF valuation should be used to illustrate values, in particular, market values. Second, REITs, just like any other firms, are prone to bankruptcy, partly because the large portion of net profits are distributed to unitholders as dividends at the end of financial years. The funds from operations (FFOs), a widely acceptable REIT performance measure, equally, predict bankruptcy of these firms. Third, quantitative and qualitative betas should be used jointly in determining whether a REIT firm is investable or not.