Today, May 24, 2022, at 10:50 AM the market price for Essex Property Trust, Inc. dropped below the ‘Buy’ point of $278 triggering the ‘Buy’ at $278 per share. Altogether, the Fund purchased 71.6846 shares. Total investment including a $1 per share transaction fee was $20,000.
Recently, the Fund reevaluated Essex Property Trust, Inc. and increased the company’s intrinsic value to $285 per share. In an article written in January of 2021, the Facilitator determined intrinsic value at $256 per share. In the course of one year, many market forces have elevated this intrinsic value higher. With real estate investment trusts (REITs), intrinsic value is strongly tied to fair market value of properties. At the end of 2020, the overall fair market value of the entire portfolio of apartments for Essex was estimated at net assets value (adjusted for closing costs, costs to sell, pay-off of associated debt and costs to eliminate book balance of financing outlays) of $19.14 Billion. This made each share worth approximately $283. During the last 16 months, the market value of real estate has jumped over 16%. Using a mere 12% adjustment to this portfolio, the modified net assets value now exceeds $21.8 Billion. This alone adds $36 per share in value. Utilizing net assets value by itself warrants an intrinsic value of $319 per share. And this assumes only a 12% increase in value over 16 months.
There is more, in addition to the increase in fair market value of the underlying assets with this REIT, cash flow per share on average has also increased. Under the formula used in the intrinsic calculation from 16 months ago, cash flow was determined to approximate $12.39 per share per year. This has improved to over $13.40 per share per year. Utilizing a similar discount rate as explained in the article, the current value of this cash flow stream is estimated at $287 per share.
The overall key is the weighting of values and the improvement in three of the four sections of the resulting formula. Look at this:
Method 2020 Determined $ Value Weighted Portion Weighted Result
Book Value $96.11 10% $9.61
Net Assets at FMV $283.46 60% 170.07
Cash Flow from Operations NPV $264.50 20% 52.90
Dividend Yield $233.72 10% 23.37
Totals 100% $255.96
Method 2022 Determined $ Value Weighted Portion Weighted Result
Book Value $90.77 10% $9.07
Net Assets at FMV $319.00 60% 191.40
Cash Flow from Operations NPV $287.00 20% 57.40
Dividend Yield $266.67 10% 26.66
Totals 100% $284.53
Because so much risk is eliminated in the core formulas and the use of a weighted outcome, the ‘Buy’ discount rate does not have to be so strong. Furthermore, there is no denying that right now the market prices for most possible members within the portfolio are not even close to intrinsic value let alone ‘Buy’ points, the facilitator has adjusted the discount rate to a low 2.5%. Finally, REITs have a distinct legal advantage over other types of investments. Under the U.S. Tax Code, in order for them to maintain their TAX FREE status, they must distribute more than 90% of their earnings to shareholders. This means, this kind of investment has a very strong dividend payout. The dividend yield at this price exceeds 3.1% per year. This is a very tempting purchase just to hold the investment for a longer period of time allowing it more latitude to acheive a much higher market recovery price. Thus, the adjusted ‘Buy’ point is set at $278 per share. Act on Knowledge.
© 2022, David J Hoare MSA. All rights reserved.