I have been calculating potential IPOListing prices/valuations for public non-traded REITs for sometime. I use a simple FFO multiple to determine a possible stock price. (FFO is Funds From Operations and for REITs is the equivalent of Earnings Per Share. So, an FFO multiple works similar to a P/E ratio for stocks.) I use a multiple of 8X to 12X, which is the historical range, although the current multiple is close to 14X.
Non-traded REIT sponsors do not like this calculation and avoid it as much as possible because most valuations come in below the non-traded REITs initial offering price. For the first time that I have seen a non-traded REIT has put this valuation method in print. The rational is the FFO valuation is too low and investors need to vote to liquidate the REIT’s portfolio rather than pursue a public stock listing through an IPO. You don’t say.
Putting the FFO metric to work on other REITs will likely result in similar below par valuations.
Here is an example. An initial $10 offering price gives an FFO of $.70 per share. Calculating times the historical range and current high give the following:
$.70 X 8 = $5.60 per share
$.70 X 12 = $8.40 per share
$.70 X 14 = $9.80 per share
While not exact, this back of the envelop calculation shows why the non-traded REIT sponsors are so anti-FFO.