Let's do a quick recap. In the previous step, step B, we went into detail on how to select exceptional reads using a series of qualitative factors. In this session, step C, we'll be touching on the quantitative side of things. And by quantitative, I mean building financial models to make sense of the financial numbers provided by the valuation models that are done with reasonable conviction and assumption can tell us a lot, such as whether a read is over or undervalued. But before we go into the nitty gritties, let's appreciate some of the following wisdom with regards to financial modeling. Practical valuation models should be guided by these three principles.

The first principle or acquires financial models to be propelled by logic. This means that most of your friends Yours assumptions and forecasts should be sensibly derived from evidence. second principle requires models to emulate Auckland's razor law. This implies that you should not make too many unnecessary assumptions in your model, and that all things being equal, the model with the least assumptions tends to be the better one. And the third principle, financial models should be grounded by reasonable conservatism, such that your figures, assumptions and forecasts should not be exaggerated. It's better to underestimate investment returns than to overestimate them.

I follow these three principles when building or using financial models. There are many valuation models out there used to value receipts from the overused discounted cash flow model to the relatively complicated funds from operations model. In this course, I'm going to teach you the three best valuation models. First up, we have the quick and easy method, the two RV model, which is used for evaluating stable reads. Then we have the dividend discount model in short DDM used for growing reads or reads with fluctuating dpu or dividend per unit. And last but not least, the popular net asset value model.

And as always, all models should be built or use in accordance with the three principles. Now for the two RV model, which is short for the two step revaluation model. The idea behind to our remodel was developed when I took part in investment pitching competition many years ago, I was asked on the spot to price a bond which had no maturity, but had been giving out dividend For the past 10 years, to my surprise, the answer which I gave sat well with the judges and my team one, all thanks to this quick method of evaluating stable investment instruments. I modified the formula applied it to stable reads and found it to be exceedingly effective in evaluating them. Finance students will find that the two RV model is very similar to the perpetuity formula. The only difference is how the return and discount rate is being derived.

So, let's dive right into the components of the formula. A D stands for average dividends and it should capture the average dividends that the stable rate has given out in the past and asked for it Dr. Which stands for discount rate. It has to capture your expectations on how much you should be reasonably compensated Investing in this specific route. Let's apply this formula. In my book winning with reads, I used healthcare trust of America as an example.

In this course, I will use another healthcare reach for practice, which is this American list of healthcare REITs called universal health reality income trust, UHT we are going to calculate the average dividends, the ADX of UHT. So, how should we go about finding their dividend information, we will head to their website@uhrt.com. at their website, locate the dividend History tab on the left hand side. Click on it and you will see the amount of dividends UHT has paid to investors throughout the years. I usually use Bloomberg to require all of my data. But if he did not have access to any financial data providers, then this is the best way to get reliable information.

Coming back to you HTS website. On their dividend History page, you will see a table showing quarterly dividends that have been paid out. add up these four quarters respectively for each year and then we will go back to their presentation. Okay, lights off. Once the figures are summed up and tabulated, you will have a table like this. Both the table and the shark show the average yearly dpu of UHT remember dpu here stands for distribution per unit.

I've included 2009 vpu, simply because I want my average dividends or add to capture the US cheese performance during the worst of times. avoid taking dpu figures that are too far off from the present as the further removed the past figures are, the less relevant the numbers will be. Okay, now to get the ad, simply add up all the GPUs and divide by six and you'll get the ad which is $2 50 cents. Now for the second step, which is the discount rate Dr. To obtain the DR you have to add both the comparable compensation rates and the uncertainty rate together. comparable compensation here means what is the minimum for which you should be compensated. And the uncertainty rate here means, how much more compensation you should expect for investing in this read.

To understand these two concepts better, let's imagine your good friend offers you an opportunity to invest in his gold mining company and asks you to quote your expected return Turn, you should think along the lines of comparable compensation plus the uncertainty rate. Your comparable compensation for this gold mining company would be the returns earned from a diversified gold ETF plus a little more compensation. At this point in time, I would like you to think for a while why you should be compensated more? Well, because your friend's gold mining business is riskier than a diversified gold ETF, don't you think? Therefore, it is logical for you to be compensated more. Feel free to write to me if you are still unsure about the concept of comparable compensation.

Right? Keeping this in mind. Let's look back at universal health realty income trust which is a healthcare route. Which index Do you think should be used? To establish a minimal compensation for healthcare re investors, think about this for 20 seconds. If you need more time to think pause this video.

Alright, If your answer is the s&p 500 index, you are not wrong, but the better answer would be the M s ci us reindex which takes into account the minimal compensation of the US read industry as a whole. The best answer would be to use the Wilshire us read ETF in short the W r e i as a comparable compensation rate because This ETF has a larger exposure to the US healthcare sector, which takes into account both country and industry specific risks. The w r E is average annual yield, which is available on websites like ETF db.com is about 3.3%. This 3.3% covers the bare minimum return with which you should be compensated to even part with money to invest in this healthcare reads. Of course, choosing the comparable compensation rate is up to your discretion. Nevertheless, let's go ahead and plug in the 3.3%.

Now for the uncertainty rates. Common sense tells me that investing in UHT is riskier than investing in w Rei. As such, I should be compensated more correct, but how much more Aha. This is where the arts part of valuation comes into play. Whether you decide to add in another 1%, or 5% depends greatly on how much you have researched on Uhg and how confident you are that this Reed is able to deliver dividends of at least $2 50 cents per unit for the foreseeable future. having read through UHT annual reports, I personally find that they have been rather consistent with their overall performance.

Therefore, I deem a tiny 1% would suffice to fulfill the uncertainty rate. Adding that in gives us a discount rate of 4.3% take $2 50 cents divided by 4.3% and you'll have $58 14 cents. That means if you he is able to give out $2 50 cent dividends continuously and my expectation of at least 4.3% is reasonable and remain so indefinitely Uhg is worth $58 and 14 cents. UHT is trading at $60 33 cents at this point in time. Expected dividend yield at this price is only 4.36%. no margin of safety and debt ratio total debt divided by total assets is relatively high at 57%.

Hmm. Looking solely at these numbers, UHT is not a buy for me, at least for now. All in all, that is how you use the to RV model. It is an undeniably simple and straightforward way to value stable rates.