Friday, November 21, 2014

Do Apartment Fundamentals and Valuations Line Up? via Property Management Insider

In the previous blog titled, “Structural Shift or Mean Reversion: Exploring the NOI Profit Margin Cycle,” we discussed the importance of the profit margin cycle in relation to the pro forma analysis. This piece will expand upon the original idea by including a valuation metric: price-to-sales ratio. A price-to-sales ratio is a common metric used in stock valuation. To derive the ratio, an analyst will divide a company’s price per share by the most recent annual revenue per share and compare the results to peer companies. Similarly, we will apply the same logic to real estate, utilizing NCREIF data with two key distinctions. The price-to-sales ratio used in the stock valuation is based on market values and annual revenue, but the analysis for this blog is based on NCREIF appraised values and quarterly operating revenue.

At the national level, the U.S. apartment sector is valued at 48.1 times the 3rd quarter 2014 revenue figure compared to the long-term average of roughly a 40 multiple. On the surface, this suggests the apartment sector is overvalued relative to the long-term norm.

Read more...Do Apartment Fundamentals and Valuations Line Up? | Property Management Insider

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