Net asset value is the private market price of the portfolio less every claim ahead of the common shares. Most of the judgement sits in three lines.
REIT NAV per share is the private market value of the portfolio, less everything that ranks ahead of the common shareholders, divided by diluted shares. Capitalise forward cash NOI segment by segment, add development, land, cash and other assets at book, deduct debt at fair value, preferred equity and other liabilities. On an illustrative industrial REIT that gives a NAV of $26.75 a share, so a $24.00 share price is a 10.3 per cent discount, and every 25 basis points on the cap rates moves NAV by about 7 per cent.
Worked in full in REIT Analysis and Valuation by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Net asset value is the anchor of REIT valuation because it answers a simple question: what would the shares be worth if the portfolio were sold building by building in the private market and the liabilities paid off? The share price can sit above or below that figure for long periods, and the gap is information. But the gap is only as good as the NAV, and most of the judgement in a NAV sits in three lines: the NOI you capitalise, the cap rates you choose and how you treat the debt.
NOI on a GAAP basis includes straight-line rent: the accounting smoothing of rent steps and free periods over the lease term. It is not cash this year and no buyer capitalises it. Strip it out first.
| Line | Amount |
|---|---|
| NOI on a GAAP basis, including straight-line rent | 457.0 |
| Less straight-line rent | −12.0 |
| Forward cash NOI | 445.0 |
Value of operating real estate = Σ segment cash NOI ÷ segment cap rate
NAV per share = (operating real estate + other assets − debt at fair value − preferred − other liabilities) ÷ diluted shares
In Excel, with NOI in B2:B4 and cap rates in C2:C4: =SUMPRODUCT(B2:B4,1/C2:C4). Choose cap rates from private market transactions for comparable assets, not from the REIT's own implied yield, or the NAV becomes circular.
| Segment or asset | Cash NOI | Cap rate | Value |
|---|---|---|---|
| Bulk logistics | 310.0 | 5.25% | 5,904.8 |
| Light industrial | 95.0 | 6.00% | 1,583.3 |
| Legacy office | 40.0 | 8.00% | 500.0 |
| Operating real estate, blended 5.57% | 445.0 | 7,988.1 | |
| Development in progress, at cost | 420.0 | ||
| Land bank, at book | 150.0 | ||
| Cash | 85.0 | ||
| Receivables and other assets | 60.0 | ||
| Gross asset value | 8,703.1 |
| Line | USD millions |
|---|---|
| Gross asset value | 8,703.1 |
| Debt at face value | −3,400.0 |
| Mark-to-market: fixed-rate debt below current rates | 120.0 |
| Preferred equity | −200.0 |
| Other liabilities | −140.0 |
| Net asset value | 5,083.1 |
| Diluted shares, millions | 190.0 |
| NAV per share | $26.75 |
The debt is fixed at coupons below today's rates, so its fair value is 3,280.0 rather than 3,400.0: the REIT owes less in present value terms than the face amount, and that 120.0 belongs to shareholders. Leaving debt at face gives $26.12, 63 cents lower. Both conventions are in use; say which one the NAV is on. Debt is 37.7 per cent of gross asset value at fair value, and 40.0 per cent including the preferred.
At $24.00 the shares trade at a 10.3 per cent discount to NAV. Put the other way, the market is valuing the operating real estate at a blended cap rate of 5.96 per cent rather than 5.57, a gap of 39 basis points.
| Cap rate shift | Operating real estate | NAV | NAV per share | Change | Price vs NAV |
|---|---|---|---|---|---|
| −50 bp | 8,786.9 | 5,881.9 | 30.96 | 15.7% | −22.5% |
| −25 bp | 8,368.3 | 5,463.3 | 28.75 | 7.5% | −16.5% |
| Base | 7,988.1 | 5,083.1 | 26.75 | 0.0% | −10.3% |
| +25 bp | 7,641.2 | 4,736.2 | 24.93 | −6.8% | −3.7% |
| +50 bp | 7,323.4 | 4,418.4 | 23.25 | −13.1% | 3.2% |
A 25 basis point move takes 4.3 per cent off the operating real estate and about 1.6 times that off NAV, because the liabilities do not move. A 10 per cent discount sounds like a margin of safety; here it disappears at a cap rate shift of 39 basis points. Whether the shares are cheap is therefore a question about the cap rates, which is the reason to check the NAV against the implied cap rate rather than against itself.
Capitalise forward cash NOI by segment, add the non-income assets, deduct debt at fair value and the preferred, and divide by diluted shares: here $26.75 against a $24.00 price. Then report the cap rate shift that closes the gap, 39 basis points, beside the discount. The NAV build and the implied cap rate for the book's worked REIT are in the free workbook for this case; how to calculate a REIT's implied cap rate runs the same balance sheet in reverse, and the REIT valuation model is a blank template.
Cash NOI, forward-looking. Straight-line rent is an accounting allocation, not income a buyer would capitalise. In the illustration 12.0 million of straight-line rent capitalised at the blended 5.57 per cent adds 215.4 million of value and overstates NAV per share by 4.2 per cent, $27.89 instead of $26.75.
It depends on the convention, so state it. Marking fixed-rate debt below current rates to fair value credits shareholders with the benefit of the cheap coupon. In the example that adds 120.0 million and 63 cents a share; at face value NAV is $26.12 rather than $26.75.
More than the property values, because debt is fixed. In the illustration a 25 basis point rise across all segments cuts operating real estate by 4.3 per cent and NAV per share by 6.8 per cent, from $26.75 to $24.93, and a 39 basis point rise eliminates a 10.3 per cent discount.
Chapters 7 and 8 of REIT Analysis and Valuation set net asset value against the implied cap rate; the free companion workbook builds both for the book's worked REIT. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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