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No. of Recommendations: 6
Usually I'm not too far off NAV per share. As with DCF, you should get values that are reasonably close to the share price today. Any large mismatches can support a case for undervalued/overvalued. With PSA my NAV/share was within a dollar or two of where they were trading. With KIM, the price was much lower than share price. I thought they were overvalued and the NAV confirmed it.

With Alexandria I am way off and I can't find an mistake. it's becoming irritating. I get an NAV/share of $151 for a REIT trading in the $90s. I know it's not undervalued.

NAVs are a lot of firm numbers with few squishy assumptions. The biggest estimate is cap rate. Reading through the conference call and their research into comps, 5%-6% looks accurate.

The rest of the values are NOI, assets, liabilities and share count. These are hard numbers and not subject to interpretation

I ran TTM 2015 and 2014 and they came within $3 of each other.

Maintenance capex is the only number that can be elusive. For ARE, they report non revenue enhancing capex etc. They expense other maintenance as incurred so that comes off NOI.

The assets and liabilities are pretty straightforward. I did exclude other assets and liabilities in one version and included them in another and it didn't make much difference

any suggestions where such a huge error comes from? I'm baffled


2014

Non-revenue-enhancing capital expenditures $7,429
Re-tenanted space $5,830
Renewal space 9,349
===================================================
Total $22,608


2014 annual NAV

NOI 508,600
=====================================
maintenance capex 22,600
straightline rent 45,500
=====================================
adjusted NOI 440,500
cap rate 0.06
=====================================
market value NOI 7,341,700

assets
Investments in real estate $7,226,016
Cash and cash equivalents 86,011
Restricted cash 26,884
Other assets 114,266
======================================
total assets $7,453,177

liabilities
Secured notes $652,209
Unsecured senior notes 1,747,370
Unsecured line of credit 304,000
Unsecured senior term loans 975,000

7.00% Series D cumulative
convertible 237,163
6.45% Series E cumulative
preferred 130,000
======================================
total liabilities $4,045,742
======================================
assets net of debt $3,407,435
======================================
assets 10,749.1
nav/share $151.0
======================================
shares 71,200


Anyone see any big liabilities missing or have ideas on recurring capex that would make this closer to reality?
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No. of Recommendations: 2
Unless I'm missing something, NAV should be net assets of $ 3,407,435 divided by shares o/s of $ 71,200 which would give you $47.85 which seems low. I'll take a look at their most recent financials and give you some additional thoughts but I don't know where you got assets of $ 10,749.
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No. of Recommendations: 0
thanks for the input

I have a typo in there sorry about that

The total assets are $10,749,000 in thousands or about $10.5 billion
You combine the assets net of debt from the balance sheet with the market value of NOI. That $7.3 billion + $3.4 billion

Divide that by 71,000 shares again in thousand which is about 71 million shares

That would be $10,749,100/71,000=$151
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No. of Recommendations: 0
It seems too high as you suggest and as it's late I haven't done the math, which I'm not good at anyway. I wonder if the convertibility into common of the 9.5 million shares of AREEP has been factored in?

jz
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No. of Recommendations: 1
i did do that separately and it went to $125--a bit closer
Still don't think it's undervalued

It's an interesting REIT in a specialized niche. The properties tend to be expensive and the tenants requirement are slightly different than office space.

They have some impressive looking buildings
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No. of Recommendations: 2
You combine the assets net of debt from the balance sheet with the market value of NOI. That $7.3 billion + $3.4 billion

Aren't you double counting? Either you can take the assets as per balance sheet and calculate NAV but then the historical cost may not give the market value so you may not want to do that. You can take the current earning power and determine the market value of it and then deduct the liabilities out of it. Since the earnings are achieved by the assets, you don't include the assets but only the liabilities.

I would like to understand why you think you need to add assets in addition to the market value of the earnings produced by the assets.
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No. of Recommendations: 3
I got the calculations at REIT University online education. So I pretty much followed their template. Cn't say their metho is right but it seemed like they knew what they were doing. I don't do each thing--some are hard like economic cap rate applied to management income. So I stick with rental NOI and comp cap rates management discusses in conference calls
The rest is pretty straight forward balance sheet items

Steve Sakwa and his colleagues on the Merrill Lynch
REIT team summarized the six-step framework they
utilize in their First Quarter 2002 NAV Handbook.

Step 1: Determine a company’s forward 12-month cash
net operating income (i.e., preleveraged cash flow minus
straightline rents). The reason for choosing this period,
rather than the prior 12 months or the latest quarter
annualized, is that purchasers of real estate generally
focus on the earnings potential of a property, not its past
performance, and cap rates are generally defined as a
consequence of the next-12-months’ income.

Step 2: Apply an appropriate cap rate to the company’s
cash NOI figure.

Step 3: Determine the value of third-party income. After
determining the actual cash flow derived from a
company’s ancillary businesses, we apply a cap rate to
the income stream. Since management contracts are
typically cancelable on short notice—often 30 to 60
days’ notice—we ascribe a substantially lower valuation
to fee income than to rental income. With few
exceptions, we use a 20% cap rate—equal to a multiple
of five times cash flow—for fee income vs. propertylevel
cap rates that range from 8.0% to 12.5%,
depending on the asset class.

Step 4: Determine the gross market value of assets.
After adding the results from steps 2 & 3, we add cash
and cash equivalents, other assets, land held for
development, value of unleased space, and existing
development projects, which are valued at historical
cost, to derive the gross market value of assets.

Step 5: Determine the net market value of assets.
Subtract total liabilities from the gross market value of assets to arrive at a net market value of assets.

Step 6: Determine the NAV per share. Divide the net market value of assets by the total number of shares outstanding to derive the net asset value per share
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No. of Recommendations: 12
MonsterFluff, I am puzzled by one thing in your calculation: NAV is calculated on the basis of market value of assets net of debt, divided by the shares outstanding. You have "assets net of debt" of $3.407 billion. If there are 71.2MM shares outstanding, that equates to an NAV of $47.75. I don't get where you arrive at $151 per share. Where does the $10,719 billion come from?

I subscribe to Green Street. They have a value of operating real estate and total assets for ARE substantially higher than yours - perhaps because they use a lower cap rate (but their liabilities figure is about 10% higher than yours). Their estimated net asset value (after debt and pfd stock), when divided by shares outstanding (close to your count), they end with an NAV in the high $90 range. I would provide more detail, but Green Street is very sensitive about clients disclosing this stuff.

Ralph
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No. of Recommendations: 4
I still don't get it. If total assets are $10.5 billion and liabilities are $4 billion, the net assets would be $6.5 billion; divided by 71MM shares outstanding is $91.50 per share. Green St's figure is modestly in excess of that, as they value the operating assets a little higher than you do (using a cap rate a little lower than 6%), but their liabilities are a little higher too).

R.
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No. of Recommendations: 2
thanks Ralph

I followed the steps from REIT U.

First calculate the market value of the NOI using the cap rate
That was $7.6 billion. That's the value of NOI.

The second group of assets that they say to value are the real estate holdings and cash. that would include land and construction in progress.

From that you have to subtract all the interest bearing liabilities namely debt, convertibles and preferreds.

The net asset value of real estate assets is $3.3 billion

The template requires you add these two assets together. That gives us $10.9 billion

Is it your understanding that only the real estate assets should count on the NAV/share and the market value of the NOI isn't part of that calculation?

I have used this method quite a few times and usually come within spitting distance of the value the REIT is selling for or I can see where the NAV may be either under or over for a reason. PSA was dead on. KIM was overvalued which I agreed with. I also did these calculations for VTR, HCN and several others during the crash in 2013 and came up with good estimates of value that have proved useful.

This one was just so far off the mark, I wondered if I was missing something

Thanks for any insights.
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No. of Recommendations: 2
Monster,

You are double counting income producing property.
That value is determined in step 2, and you have
included it again when you calculated the last
portion of step 4 to . . . . .

"add cash and cash equivalents, other assets, land
held for development, value of unleased space, and
existing development projects, which are valued at
historical cost, to derive the gross market value
of assets"

This is done to account for all the non-income
producing assets on the balance sheet that aren't
already captured in step 2 and 3.

JD
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No. of Recommendations: 3
MonsterFluff,

In step one you calculated the market value of ARE's real estate operating assets (the 7,341,700 number) using NOI and cap rate. The intent of this step is to come up with a more realistic value for real estate operating assets rather than using the depreciated cost basis on the balance sheet. However, in the second group of assets you added the depreciated cost basis of ARE's real estate operating assets (the 7,226,016 number). You have already accounted for the real estate operating assets in step one, so you can't count them again. The second group should only include assets other than real estate operating assets.

Also, the $7.3B number you get using NOI and cap rate -- which is supposed to represent the market value of the real estate operating assets -- is very close to the depreciated cost basis, which doesn't sound right. I suspect that the issues you are having are with step one.

Hope this helps.
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No. of Recommendations: 2
thanks guys

I got the approach at this website

https://samples-breakingintowallstreet-com.s3.amazonaws.com/...

Initially I did consider adding in the market value of NOI was double counting. When I do an NAV for a non-REIT I do it the way you all suggest-estimate all values of depreciated assets and include receivables, other assets inventory etc and subtract all liabilities. That approach has some squishy elements like estimated how much inventory is worth and how mach in AR you might get.

Using the method from the link most often gets you quite close to the price per share much like a realistic DCF. The squishiest number is the cap rate. The NOI is as reported by the company. The only way to move this around is to assume different cap rates much like you do with expected return or discount rate in a DCF. I do this when the cap rate isn't clear. For ARE they were very clear about the range of their properties and comps. The 6% is very close.

For most of the REITs I have doneI the balance sheet assets are quite a bit higher than the NOI. I usually add in other assets but didn't in ARE. They were $114 million so didn't amount to that much at the end of the calculations. Took them out to see if the values became more reasonable. Because I used all hard numbers with little room for squishy assumptions, if the NOI is close to the value of the balance sheet assets, that's pretty accurate--it's all their numbers and the cap rate they assume. In which case that's kind of interesting.

That gets us back to if this is double counted.Balance sheet assets alone divided by shares tend to always lead to a value that's below the market price of shares I'm not sure that counting the value of income in a REIT makes the NAV excessive and double counted--usually it brings it right in line. I don't know. I assumed the guys at the link had a reason for approaching REITs this way. They don't say why they do it.
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No. of Recommendations: 7
MonsterFluff,

The site you linked to gives an example of a NAV calculation done by Barclays Equity Research on UDR (an apartment REIT) based on UDR's Q4 FY2010 data. The NAV calculation is on page 8 of the PDF: https://samples-breakingintowallstreet-com.s3.amazonaws.com/...

Here is the UDR 10-K for 2010: http://www.sec.gov/Archives/edgar/data/74208/000095012311017...

If you compare the NAV calculation to the numbers in the 10-K it's pretty clear what's going on. Barclay's is using forward-looking NOI and Cap Rate to determine the *market value* of the real estate operations ($7.3B). They are not using the depreciated cost basis ($5.1B) anywhere in the calculation. They add in other real estate (construction in progress and land held for development) and other assets (cash, etc.) -- all at cost basis -- to get Gross Market Value of Assets, and then they subtract debt and other claims to get NAV.

It makes sense to use a market value calculation rather than the depreciated cost basis for the real estate operations because you would expect these assets to appreciate in value.

Hope this helps.
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No. of Recommendations: 0
this helps

I think yall found the problem. I misread the asset additions. The intention is to capture anything that hasn't had a chance to add NOI but will. The cutoff or definition of "new" may be squishy but it might be best to do less than one year only

That should fix it
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No. of Recommendations: 6
Is it your understanding that only the real estate assets should count on the NAV/share and the market value of the NOI isn't part of that calculation?

Yes, real estate NOI is built into the NAV estimate, so adding them together would be double-counting. That said, I think a good NAV analysis would give credit for non-revenue producing assets, such as development in process and a land bank.

I guess I'm missing something in your other NAV analyses, but I don't see how we can capitalize NOI and add that to the real estate values. Real estate is valued in many ways, including capitalizing NOI, using replacement cost, etc., but I still think adding NOI value to real estate value would be double-counting.

R.
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