Net Value Per Share (NAVPS) in Publicly Traded Real Estate Securities Valuation

NAVPS refers to the (per-share) amount by which assets exceed liabilities. The amount is computed using current market values, as opposed to accounting book values, divided by the number of shares outstanding. NAVPS is generally considered the most appropriate measure of REITs’ fundamental value (and REOCs) compared with book value per share. If the REIT market price varies from NAVPS, this is seen as a sign of over or undervaluation.

Estimation of NAVPS using the Forecast Cash Net Operating Income

Remember,

$$ \text{NOI}=[\text{Gross Rental Revenue}- \text{Operating Costs}] $$

Where:

Operating costs include estimated vacancy and collection losses, insurance costs, property rates and taxes, utilities, repairs, and maintenance expenses.

Furthermore,\(\text{EBITDA}=[\text{NOI}-\text{G&A Expenses}] \)

Where:

EBITDA refers to earnings before interest, depreciation, and amortization, while G&A expenses refer to general and administrative expenses. In the absence of a reliable appraisal, experts estimate operating real estate’s value by capitalizing on the net operating income. This procedure requires computing a market-required return rate, the capitalization rate (“cap rate”), based on the prices of recent similar transactions in the market.

Remember,

$$ \text{Cap rate}=\frac{\text{NOI}}{\text{Property Value}} $$

Where:

NOINOI refers to the net operating income, which is the expected income in the subsequent years.

The above calculated “cap rate” can then be used to capitalize the NOI as follows:

$$ \text{Property Value}=\frac{\text{NOI}}{\text{Cap rate}} $$

Example: Estimating NAVPS

Ernst & Frank Real Estate valuers are undertaking a valuation of the Garden City Shopping Mall REIT. The valuation is based on the following financial data for Garden City, and estimate NAVPS based on forecasted cash net operating income.

$$ {\begin{array}{l|r}  \text{Last 12 months NOI} & $90,000 \\ \hline \text{Cash and cash equivalents} & $30,000 \\ \hline \text{Accounts receivable } & $20,000 \\ \hline\text{Total debt } & $300,000 \\ \hline\text{Other liabilities} & $65,000\\ \hline\text{Non cash rents} & $3,000 \\\hline\text{Full-year adjustments for acquisitions } & $2,000 \\ \hline\text{Land held for future developments} & $15,000 \\\hline\text{Prepaid/other assets minus intangibles} & $6,000 \\\hline\text{Next 12 months NOI growth estimate} & 1.25\text{%} \\\hline \text{Cap rate based on recent comparable transactions} & 10\text{%} \\ \hline\text{Shares outstanding} & 20,000 \\ \end{array}}$$

Solution

Step 1: Calculate the expected cash NOI for the last 12 months:

$$ {\begin{array}{l|r} \text{Last 12 months NOI } & $ 90,000 \\\hline \text{Non cash rents} & ($3,000) \\\hline \text{Full year adjustments for acquisitions} & $2,000 \\ \hline\text{} & \bf$89,000 \\ \end{array}}$$

Step 2: Calculate the estimated next 12-month cash NOI:

$$ {\begin{array}{l|r} \text{Expected cash NOI for the last 12 months} & $89,000 \\\hline \text{Next 12 months growth in NOI} & \\\hline (1.25\text{%}\times$90,000)& $1,125 \\ \hline\text{} & \bf$90,125 \\ \end{array}}$$

Step 3: Calculate the estimated value of operating real estate:

$$ \begin{align*} \text{Operating property value} &=\frac{\text{Estimated next 12}-\text{month NOI}}{\text{Cap Rate}} \\
\text{Operating property value} & =\frac{$90,125}{10\%}=$901,250 \end{align*} $$

Step 4: Calculate the estimated gross asset value:

$$ {\begin{array}{l|r} \text{Estimated value of operating real estate} & $901,250 \\ \hline\text{Cash and cash equivalents} & $30,000 \\ \hline\text{Land held for future developments} & $15,000 \\ \hline\text{Accounts receivable} & $20,000 \\\hline \text{Prepaid/other assets minus intangibles}& $6,000 \\ \hline\text{} & \bf$972,250\\ \end{array}}$$

Step 5: Calculate the net asset value:

$${\begin{array}{l|r} \text{Estimated gross asset value} & $972,250 \\ \hline\text{Total debt} & ($300,000) \\\hline \text{Other liabilities}& ($65,000) \\ \hline\text{} & \bf$607,250\\ \end{array}}$$

Step 6: Calculate the net asset value per share (NVPS):

$$ \text{NVPS}=\frac{\text{Net Asset Value}}{\text{Shares Outstanding}}=\frac{$607,250}{20,000}= $30.36 \text{ per share} $$

Question

Which of the following statements about using net asset value per share (NAVPS) in REIT valuation is the most accurate?

1. NAVPS is the resulting difference between the accounting book values of a real estate company’s assets and its liabilities, divided by outstanding shares.
2. NAVPS is considered a superior measure of the net worth of a REIT’s shares, compared with book value per share.
3. NAVPS is precisely equal to the intrinsic value of REIT shares.

Solution

The correct answer is B.

NAVPS is a superior measure of the net worth of a REIT compared to book value per share based on historical cost values.

A is incorrect. NAVPS is the difference between a REIT’s assets and liabilities, about current market values, instead of accounting book values, and dividing by the number of outstanding shares.

C is incorrect. NAV is the most significant element of the fundamental worth of a REIT. The non-asset-based income stream values, management added value, and contingent liability values are factors that contribute to essential value.

Reading 37: Investments in Real Estate Through Publicly Traded Securities

LOS 37 (b) Justify the use of net asset value per share (NAVPS) in valuation of publicly traded real estate securities and estimate NAVPS based on forecasted cash net operating income.