Valuation and Returns · REITs

Net asset value estimates what remains for shareholders after valuing assets and subtracting claims. Small changes in property yields can produce large changes in leveraged equity value.

Build from property income to equity

A capitalization rate relates a property's annual NOI to its value. In a simplified stable income model, property value equals NOI divided by the cap rate. Add other assets, subtract debt and other claims, then divide the amount attributable to ordinary shareholders by the appropriate diluted share count. Joint venture ownership and preferred securities require consistent treatment.

Choose assumptions rather than a desired answer

Cap rates reflect the property, market, expected income and transaction environment. A trophy asset and a building needing extensive work should not automatically receive the same rate. Use a range supported by relevant evidence. For changing income streams, a detailed discounted cash flow model may be more useful than capitalizing one year's NOI.

See the leverage effect

Consider $10 million of sustainable NOI. At a 5% cap rate, estimated property value is $200 million. With $80 million of net debt and no other adjustments, equity is $120 million. At 6%, property value becomes about $166.67 million and equity about $86.67 million. The property value falls about 16.67%, while equity falls about 27.78%.

Understand why price can differ from NAV

Market prices can reflect financing constraints, management quality, future capital spending and doubts about the valuation assumptions. A discount is not automatically an opportunity that will close. State whether your estimate assumes continued ownership, a sale or another scenario. Transaction costs and taxes can matter, particularly when using liquidation logic.

Try it yourself

A property earns $6 million NOI and is valued at a 6% cap rate. Net debt is $40 million and there are three million shares. What is simplified NAV per share?

Show the worked answer

Property value is $100 million. Equity is $60 million after net debt, giving $20 per share. Additional assets, liabilities and selling costs would change a real estimate.

Further reading

Educational material, not a recommendation to transact. All numerical examples are hypothetical and exclude costs unless stated. Actual terms, eligibility, tax treatment and broker procedures depend on the security and jurisdiction.

Continue learning