Real Estate Fund:
Methodology
Our investment process seeks to build a stable, low turnover fund, with the goal of providing attractive risk-adjusted total returns over the long term. Typically, the Fund will own the stocks of 25-40 REITs and commercial real estate-oriented companies, diversified across all important commercial real estate sectors.
  1. Phocas Financial begins by considering all major equity REITs and commercial real estate-oriented companies.
  2. We come up with a quantitative ranking, using three valuation methods weighted to account for where we are in the commercial real estate cycle:
    Net asset value ("NAV") analysis;
    Discounted free cash flow ("DFCF"); and
    Adjusted funds from operations ("AFFO") multiples.
  3. We conduct a qualitative analysis of each REIT or commercial real estate-oriented company, focusing on:
    Management quality;
    Balance sheet flexibility;
    Asset quality / strong long-term (high barrier to entry) locations;
    Potential for AFFO and NAV growth; and
    Intrinsic value relative to market price.
  4. Finally, we construct a diversified portfolio:
    Weighting of sectors is based on individual security valuation levels and appreciation prospects; and
    Representation generally in all important sectors.
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Client Services
Adjusted Funds From Operations ("AFFO")
This term refers to a computation made by analysts and investors to measure a real estate company's cash flow generated by operations. AFFO is usually calculated by subtracting from Funds from Operations ("FFO") both (1) normalized recurring expenditures that are capitalized by the REIT and then amortized, but which are necessary to maintain a REIT's properties and its revenue stream (e.g., new carpeting and drapes in apartment units, leasing expenses and tenant improvement allowances) and (2) "straight-lining" of rents. This calculation also is called Cash Available for Distribution ("CAD") or Funds Available for Distribution ("FAD").
Discounted Free Cash Flow ("DFCF")
Discounted Free Cash Flow ("DFCF") is a valuation method based on several factors including cost of capital, cash flow projections, cash flow from operations, cash flow from rental and real estate activities, cash flow from passive investments like dividends, interest income, and royalties.
Net Asset Value ("NAV")
The net "market value" of all a company's assets, including but not limited to its properties, after subtracting all its liabilities and obligations.