CFA Level 2 | Net Asset Value (NAV) Approach for REITs

So the net asset value per share is a difference between a real estate company's assets and its liabilities all taken at the current market values instead of accounting book values and

then divided by the number of shares outstanding. So in the formula the net

outstanding. So in the formula the net asset value per share is equals to the operating real estate value plus any land cash and equivalents accounts

receivables other assets minus total liabilities and then we divide by the number of shares outstanding.

Now the net asset value per share is a superior measure of the net worth of a company compared with the book value per share and is often used as a fundamental benchmark for the value of a REIT or

REOC.

If there's a discount in the REIT's share price from the net asset value per share, we can interpret it as a potential undervaluation.

Then if there's a premium in the REIT share price to the net asset value per share, that could suggest potential overvaluation unless there were indications of

positive future events like a successful property development completion or expected high value creation by the management team.

Now for the operating real estate value, we will usually look for results of existing appraisals if they are available. Now, if they are not

available. Now, if they are not available or if there is a disagreement with the assumptions or methodology of the appraisals, the analyst will often

capitalize the rental streams which is represented by the net operating income that are produced by the RITs or the REOC's properties using a market

required rate of return which we call the cap rate. Now we look at this example for equity rate. Okay, we have the details for the last 12 months real

estate NOI, the non-cash ranks, the cap rate, the cash and equivalents, the land held for future development, accounts receivable, total debt, other liabilities and shares outstanding and

the growth rate of NOI is assumed to be 2%. So we will attempt to compute the

2%. So we will attempt to compute the net asset value per share for this equity rate. Now uh take note that the

equity rate. Now uh take note that the NOI given here is for the last 12 months. This is historical. What we are

months. This is historical. What we are going to do is we are going to calculate the pro for cash net operating income for the next 12 months which is we are

looking for the NOI in year one. Okay,

for the coming year. So when you have non-cash rents we have to remove it from the NOI. So we will minus okay we'll

the NOI. So we will minus okay we'll minus off. So that will be 400 million.

minus off. So that will be 400 million.

And the growth for the next 12 months in NOI is assumed to be 2%. So 2% time 400 million that's 8 million.

So that gives us 48 million for the next 12 months. So this our estimation. So to

12 months. So this our estimation. So to

find the estimated value of the operating real estate, we will need to take the net operating income for the coming year divide by the cap rate. So

if you divide 48 million by 8% that gives us $5.1 billion.

And then we just need to compute the total assets. So we'll take the value of

total assets. So we'll take the value of the operating real estate plus cash and equivalents plus land held for future development plus accounts receivable and

that will be equals to $5.194 billion.

And take note that here we exclude the intangible assets. Uh we will subtract

intangible assets. Uh we will subtract the total debt and other liabilities from the total assets. So that gives us $4.144

billion.

And now we have the net asset value and divide that by the shares outstanding.

So the net asset value per share will be $4.144 billion divide by 60 million shares.

So that will give us a net asset value per share of 69.07 and then we will compare this with the RIT's share price to see whether is

there a potential undervaluation or potential overvaluation.