Dear Readers,
With Nexus Select REIT - India's first retail REIT IPO closing tomorrow (May 11, 2023), I was curious to apply some of the concepts from my CFA Level 2 days into practice and try to evaluate the REIT both from the due diligence and valuation perspective rather than simply stating the IPO facts.
Backed by Blackstone, a global leader in real estate investments, Nexus Select makes a compelling case in my due diligence framework, while valuations also seem fair. The REIT will have a pre-tax yield of roughly 8% for the first year- similar to some of the AAA-rated NBFC fixed deposits in the market. For next 3 years, average expected yield is 9%, as per the management estimates. However, the REIT does allow you to capture the upside as rents and real estate prices increase. So, as far as return expectations are concerned, we could see around 10-11% average CAGR (dividend yield + some price appreciation) over the medium term.
Due diligence: I have tried to evaluate the REIT on nine different parameters ranging from competition, rent, and tenant profile to balance sheet analysis. The detailed analysis is in the attached document at the end.
Valuations: REITS are valued differently than any listed equity company. I've used three different approaches for valuing Nexus Select Trust:
Net Asset Value Method: This method compared the IPO price with the estimated REIT NAV.
Price to FFO (Funds From Operations) Multiple: Since there are no peers for Nexus in India. I used the average Price to FFO Multiple for Shopping Centers and Mall REITS listed in the USA as a benchmark and adjusted for growth premium.
Discounted Cash Flow Method: Since, REITS pass on 90-100% of the cashflows to the investors, using the DCF method made sense. I used the H-Model to project cashflows and derive a fair value estimate.
Below attached is a PDF file for a detailed due diligence check and a valuation summary. Happy to connect with you over email for the Excel file as well.
For the general IPO details of Nexus Select Trust, you can check out the below link for your reference: https://www.bqprime.com/business/nexus-select-trust-reit-ipo-all-you-need-to-know
Since this is my first attempt at valuing a REIT, I would appreciate your thoughts and insights. Let's keep going, we are halfway to the weekend!
Happy Investing,
Shivam Jain
Disclosure: I’m not a SEBI Registered Investment Advisor. All content on this website is purely for educational purposes. Please consult your financial advisor before making any decision.
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