Company Valuation Under IFRS : Interpreting and Forecasting ...

Company valuation under IFRS
to fade to a zero value added, that returns can usefully be split between stable
operating returns and widely fluctuating capital returns, and that the long end of
forecasts can assume no retention of operating profits.
5.2.3 Adjusting for financial liabilities
In Chapter 5 it was made clear that when bridging the gap between a calculated
fair value of the enterprise value of a company and that of its equity, deductions
for the financial liabilities should be at fair value, rather than at book value. This
is particularly important for property companies, since movements in the value
of the property portfolio will be accompanied by changes in deferred tax
liabilities, and probably also by changes in the fair value of the company’s debt,
and possibly also of derivatives associated with the debt. This should be clearer
after reading the glossary below, but the general point is that where accounts do
not record balance sheet items at fair value then fair value number (debt, for
example) should be substituted for balance sheet numbers.
5.2.4 Real estate terminology
There are two areas of terminology that relate to property companies that are
unique to the sector. The first relates to yield which, as we have seen, is a key
determinant of valuation for real estate. And the second relates to the definition
of net asset value (NAV). While our proposed approach to modelling property
companies is, as with industrials, to model returns to capital, and to deduct
financial liabilities at the end, to derive a fair value of equity, property company
reports and accounts place heavy emphasis on various measures of net asset
value, the point being that this is a proxy for the fair value of the equity based on
the current portfolio of assets. The definitions that follow are based on a glossary
produced by British Land (REIT). References to EPRA below refer to the
European Public Real Estate Association.
Initial yield is the annualised net rents generated by the portfolio expressed as a
percentage of the portfolio valuation, excluding development properties.
Reversionary yield is the anticipated yield which the initial yield will rise to once
the rent reaches the estimated rental value. Increases to rent arise on rent reviews,
letting of vacant space and expiry of rent free periods.
Equivalent yield is a weighted average of the initial yield and the reversionary
yield and represents the return a property will produce based upon the timing of
the income received. In accordance with the usual practice, the equivalent yields
(as determined by the group’s external valuers) assume rent received annually in
arrears and on gross values including prospective purchasers’ costs.
EPRA net assets (EPRA NAV) are the balance sheet net assets plus the surplus on
trading properties, excluding fair value adjustments for debt and related
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