REIT Valuation using Net Asset Value or NAV. While public REITs are certainly liquid investments, the notion behind NAV is that the very robust private real estate market of buying and selling buildings is a more efficient way to value assets. The basic steps of an NAV calculation are: one, establish the market value of the real estate or operational assets, both controlled and non-controlled. This would include JVs and equity or co-investments. Secondly, we find the market value of all other assets on the balance sheet. Thirdly, we subtract the market value of liabilities or other claims on assets. Other claims on assets would be non-controlling interest or redeemable non-controlling interest from the op-co property contributors. This brings us to our net asset value. The NAV is rooted in the market value of the real estate assets of a REIT. Determining the market value of many individual assets is critical. Like any valuation methodology, there are complications, particularly as the size of the REIT grows. First of all, it can be difficult to value properties individually for larger REITs. Therefore, properties tend to be grouped by property type, property class, location, et cetera. Secondly, like most valuation techniques, we need forward earnings to derive the valuation. Some sort of forecast or estimate of the operating earnings will be needed, and again, unless you are prepared to do this for every single building in the portfolio, which is not always possible, estimates must be made. Thirdly, as we will see, NAV uses cap rates to determine the values of the operating assets. Cap rates will thus be needed along the same lines as the property groupings. Cap rates will therefore be needed along the same lines as the properties were grouped or segmented. Lastly, we need to consider property in development or redevelopment as those properties will soon be generating value in the future. Step one, valuing the operating real estate assets. To value the operating assets, we need to determine the cap rate for the various segments of operating activities. In this case, we have three operating activities, real estate properties that are wholly owned, real estate properties that are jointly or partly owned and management fees from managing properties. These three would often be referred to as capitalized income streams. We are going to take those income streams, and by applying a cap rate, convert them to asset values. Determining the cap rate is very tricky and a bit of a chicken and an egg calculation. In our section on cap rates, we learned that cap rate is the forward net operating income over the asset value. In this case, we are looking for the asset value. So how do we get the cap rate? Cap rate calcs are highly proprietary and result from reams of data not always available to the average person. There are some good sources online such as CBRE, which only require online registration. As for our income streams, we have selected a cap rate of five and a half percent for our real estate assets and 6% for our JVs. That means that the JV properties are valued slightly less for one reason or another. The management fee income is given a high cap rate of 15%. This is because those contracts are very cancelable and not entirely dependable. The industry average for cap rates of management fees range from 12 to 20%. We have forecast the NOI of these income streams in the second column. These might be our own calcs from our model or perhaps from a broker's report. We should consider deducting maintenance CapEx from NOI of our own properties. We should definitely consider deducting maintenance CapEx from NOI of our own properties if that hasn't already been done. Dividing our forward income by the cap rate gives us our current market value of the assets in the final column. Step two, add the market value of other assets. For other assets, it's a little more straightforward as these assets are not generating income. In the case of developments, we need to be conservative. They generally will be worth more than they're currently valued but it is not a great idea to value these at full throttle revenue generating capacity as it will take years for the assets to be complete and to establish a stabilized revenue stream that is capable of being valued. Here we have applied 110%. Land held for development is valued at slightly less at 105%. The other assets are being valued at about 100% of book value. That is standard unless we know something specific about it. Note while that we are valuing the equity and co-invested JV investments here at zero since we have already factored those into the valuation in step one. Applying the percentages to the balance sheet values and we get our current values in the final column. Step three, subtract the market value of liabilities and other claims. We now need to calculate the market value of the liabilities and other claims that we will deduct from the total assets. Again, there's not much mystery here. We generally take the liabilities at 100% of market value. The NCIs are, again, the non-controlling share of buildings or assets the target company has purchased the controlling and consolidating stake in but does not have a 100% stake. Here, these are being valued at book value for simplicity. In the case of a live transaction, we would have to be more specific and value the NCI also at market value. These are traditional non-controlling interests and do not include the shareholder units from the operating partnership. Step four, calculate NAV and NAV per share. Finally, we add the asset values and subtract the claims and we come to an NAV of 4,770. We divide this by the fully diluted shares outstanding of 250 and we arrive at a $19.08 NAV per share. We always use fully diluted shares in valuation, meaning we adjust for any options that are in the money or that would convert to shares if the company changed hands.