How to factor ongoing fees into UK REIT valuations

A quick guide on factoring ongoing fees into Graham Number valuations for UK REITs.

One of the small details you’d be forgiven for missing when it comes to UK-listed REITs is that they have ongoing fees. These are deducted from earnings at various rates depending on the company so you need to account for them when calculating the Graham Number to value the company more accurately.

The Graham Number is a conservative valuation method for finding the fair value of a company’s stock. You typically calculate it by finding the square root of 22.5 multiplied by the average of three years worth of diluted earnings per share multiplied by the book value per share.

You can amend this calculation to account for ongoing fees fairly easily too so you don’t pay over the odds.

Below is the calculation you’d use to find the Graham Number of Urban Logistics REIT (LON: SHED) if you had overlooked the ongoing fees:

√(22.5×((−0.18+0.49+0.22)÷3)×1.85) = 271p

Now, if you head over to aic and find out SHED’s ongoing fees, you see that they are at 1.58% so now we can adjust the above calculation as follows:

√(22.5×(((−0.18+0.49+0.22)÷3)−1.58%)×1.85) = 196p

You can see it’s a bit of a step down when you factor in the fees that are being taken off the earnings. Now that you know the fair value, you still want a margin of safety for yourself of at least 20% so that brings the maximum buying price of this share all the way down to 157p.

The Association of Investment Companies (aic) is a great resource for looking up the ongoing fees for UK-listed REITs and you’ll probably want to come back to it every now and again to make sure there haven’t been any significant changes to the fees that drastically mess with your valuation of the company.

On a slightly unrelated note, if you are investing in REITs in the UK, the dividends are counted as property income and as a result, 20% of the dividend is withheld as tax. You get to keep that 20%, however, if you hold the REIT in a tax-free account such as an ISA. This is something else to keep in mind if dividends are important to you.

Not financial advice.