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Author: ValueWolf Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 47  
Subject: ROIC Valuation Date: 7/21/2011 6:56 PM
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I was just hoping you could give a little more color on your valuation for ROIC. I find the idea very interesting, but your valuation at ~2.0x book value seems a bit aggressive. You cited that figure as an average across the REIT universe - does that average clean book value figures, for instance by taking out accumulated depreciation or adjusting property values?

Essentially, Tanz and team have accumulated the vast majority of their portfolio over the past year. Historically, REITs have traded near NAV (https://www.greenstreetadvisors.com/pdf/sample_research/Nort...). Now let's assume Tanz bought in at fair value (i.e. what everyone else got on the street); then the FV price on the shares should be book value adjusted for accumulated depreciation. Now let's consider that (a) Tanz got them for below fair value and (b) he will earn great returns on retained earnings. I agree with your jockey argument and these likely have truth to them, but the margin of improvement doesn't seem large enough to justify a jump from 1.0x to 2.0x to book.

I also thought of it this way - if I bought in at book value, it would be like contributing money to a private real estate fund ran by Tanz and team. Since they are still putting cash to work and the assets on the book were all purchased within the past year, book value is an accurate gauge of his cost. Perhaps the properties have appreciated a bit, but probably not too much. Now if Tanz is as good as you say he is and the opportunity is good, then investing in a fund with him would make sense. Our "margin of safety" is built in by getting his talent at book value, i.e. his ability to earn returns above our cost of capital. But I don't think I would buy into such a fund at a 100% premium. That doesn't seem justifiable.

Based on the current share price I think shareholders do okay or good. But I don't know if 2.0x is appropriate and I don't know if the current share price, 15-20% above book, gives a large enough margin of safety. Btw, I think your original article ran when the shares were at $9.94, right around BV, represented a good entry choice. But you guys say to still buy below $12, which seems a bit rich to me.

Thanks for the idea, I have found it interesting to look at.
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Author: CM001 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 46 of 47
Subject: Re: ROIC Valuation Date: 7/22/2011 1:33 AM
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Calculating REIT NAV is tricky. You need to really know the market(s) where the properties are located. The BV is not a good measure, as they represent the cost at the time of purchase rather than the current value. So I guess the better measure is AFFO.

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Author: ValueWolf Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 47 of 47
Subject: Re: ROIC Valuation Date: 7/26/2011 1:20 PM
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I would typically agree, but in ROIC's case nearly all of the properties have been purchased in the lst 1-2 years, so recorded cost should be a decent proxy of NAV since mgmt bought the properties at market prices. Perhaps mgmt got above-average deals, but cost should still be in the ballpark. It is hard to calculate AFFO for ROIC since they do not have an established operating history and are still adding on new properties and levering up.

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