REIT NAV Models 101: How to Set Them Up, and What Makes Them Tricky
You’ll learn about Net Asset Value (NAV) Models for REITs in this lesson, including the basic idea and what makes them more complex than they seem at first glance - with examples from Park Hotels, AvalonBay, and Digital Realty.
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Table of Contents:
1:47 The Basic Idea Behind a NAV Model
6:30 Why NAV Models Can Get More Complex
9:37 AvalonBay Example
13:25 Digital Realty Example
18:37 Recap and Summary
Resources:
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Lesson Outline:
We get a lot of questions from students and professionals who think that NAV Models seem “too easy.”
The truth is that the basic idea is quite simple - you re-value a REIT’s Assets, re-value its Liabilities, and then subtract its Liabilities from its Assets to calculate its Net Asset Value.
Then, you can calculate NAV per Share and compare it to the REIT’s current share price to determine whether or not it is valued appropriately.
In practice, that means that you project the REIT’s forward NOI from properties, divide by an appropriate Cap Rate to estimate their value, mark up other Assets slightly, write down Goodwill/Intangibles, mark the Debt to fair market value and adjust the Other Liabilities, and then subtract the Adjusted Liabilities from the Adjusted Assets.
However, NAV Models are significantly more complex in real life because it takes more effort to project the REIT’s NOI, it can be tricky to factor in Acquisitions, Developments, Redevelopments, and Dispositions, it takes time and effort to find the right Cap Rates, and you must split out the JV Assets and Liabilities separately, re-value them, and then multiply by the REIT’s ownership percentage to factor them into the calculation.
With AvalonBay, we built a detailed forecast for all the segments, including a split by geography and business activity, and then we applied a separate Cap Rate to each one, based on data from JLL and the company’s investor presentations.
We factored in the REIT’s acquisitions, developments, redevelopments, and dispositions by making the forward NOI include the additional NOI and lost NOI from those activities, and we subtracted out the associated assets from Construction in Progress on the Balance Sheet.
We created mini-projections for the Equity Investments, capped the NOI from them at a similar rate, adjusted the Assets and Liabilities up/down, and multiplied by AVB’s approximate 25% ownership to determine the proper values.
With Digital Realty, we lacked detailed forecasts, so we simply annualized the most recent quarter’s NOI, adjusted it for non-cash items such as the straight-lining of rent and above/below-market lease amortization, and also factored in the NOI lost and gained from other activities in the quarter.
We then assumed a modest growth rate over the next 12 months to calculate the cash NOI.
We reflected acquisitions, developments, and dispositions by including the NOI from those activities in the annualized figure and also subtracting the backlog from Construction in Progress and including several other items related to them on the Balance Sheet.
We Googled for data center Cap Rates and settled on a range of 6.5% - 7.5% based on industry surveys and nationwide data.
We used the company’s own disclosed figures for the Joint Ventures and accepted them at face value, simply applying our own Cap Rate to the annualized cash NOI from JVs.
If you have a lot of time and data, the AvalonBay approach is best because it will give you more accurate results.
But if you have little time or poor data, the Digital Realty approach can work well and still deliver decent results if you’ve chosen reasonable Cap Rates.
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Пікірлер: 22
You are the Best !!!! God bless You Bro.
@financialmodeling
6 жыл бұрын
Thanks for watching!
I want to try REIT in our city .. but i dont know how i can start 🤦🏻♀️🤷🏻♀️
Hi, in the DLR NAV model, why are you adding back the Straight-Lining of Rent & subtracting the Below-Market Rent Amortization? aren't those figures suppose to help us in getting the appropriate NOI for the company's assets?
@financialmodeling
6 жыл бұрын
Those items could go either way depending on the signs. Straight-lining of rent & expenses may have a positive or negative impact depending on the properties. You are attempting to find the Cash NOI, not the GAAP NOI, so these adjustments go in both directions.
Hi, I have learned a lot from your channel, thank you. I have always wanted to try the data myself, so my small question is what source do you always use to get the financials of all the Companies? Thanks again
@financialmodeling
6 жыл бұрын
Google "Company Name" + "investor relations"
Great video, but don’t you need to annualized the quarterly NOI? Ie. multiply by 4 and then calculate the NAV?
@Joseph-wg5qb
2 жыл бұрын
Never mind, I just realized that’s exactly what you did!
I am trying to value DEI, but i dont have the NOI for regions in investor relations or annual report. Any other way to find those?
@financialmodeling
9 ай бұрын
You might be able to find estimates in equity research if you have access. Otherwise, you'll probably have to use Operating Income in the filings and see if you can adjust for corporate overhead to get to NOI and use that. Honestly, though, if a REIT does not disclose NOI by region, you're almost better off valuing it with a DCF and simple multiples rather than a NAV model.
@priyankpatelsmathssolution1743
9 ай бұрын
Hey, Thanks!! That was helpful. Any way of contacting you, for professiional purposes?@@financialmodeling
Any way to collect NAV discount/premium for different countries?
@financialmodeling
8 ай бұрын
There's no free source I know of with this information. You would probably need access to Capital IQ, FactSet, or one of Green Street's services (a REIT valuation and research specialist).
Why historical book value of real estate "net of acc. depcn"? I thought that depreciation should be added back because properties tend to appreciate over time.
@financialmodeling
4 жыл бұрын
Under IFRS, REITs do not record Depreciation on Properties and instead mark the Properties to Fair Market Value each year with a Fair Value Gain or Loss on the Income Statement. But under U.S. GAAP, REITs do not do this but instead record Properties at historical cost and Depreciate them over long periods, such as 30-40 years. But it's just the accounting treatment and doesn't represent the market value of those properties, which is the whole point of a NAV model where you adjust for this.
Hey, How do you account for JVs?
@financialmodeling
9 ай бұрын
In short, you have to separate out the JV assets, value them based on a forward Cap Rate separately, and then subtract their associated liabilities... and then add the JV NAV to the REIT's overall NAV by multiplying by the REIT's ownership percentage in the JV.
Why would you mark debt to market value? The underlying debt obligations of the properties in the portfolio do not change irrespective of market valuation. E.g. if I’ve got a $100mm building with $60mm of debt principal and a 5% fixed interest rate 15 year amortization and 5 year maturity, none of that changes if interest rates change and the market value of the debt changes if it is sold. Why do we care about trading value at all, rather than just the cash flow impact of the debt itself?
@financialmodeling
Жыл бұрын
In any type of Balance Sheet-based valuation (NAV model, liquidation valuation, etc.), the standard practice is to mark all assets and liabilities to market value because you're effectively assuming that the assets are sold to repay the liabilities. You're correct that the market value of debt does not affect how much is actually owed upon repayment or how much in interest the company is paying, but people still mark it to market value in NAV models for REITs for some reason. It would probably be more accurate to do this in a restructuring/bankruptcy setting, but even there, the market value doesn't affect how much the company owes upon maturity.
@34hqtu89o9
Жыл бұрын
Thank you for responding, really like your videos and BIWS got me into finance. So in practice, would someone at a secondaries fund focused on discount to NAV care about the marked to market debt, or would they simply be looking at FMV of the portfolio less book value of existent debt?
@financialmodeling
Жыл бұрын
@@34hqtu89o9 I don't know, sorry, as we don't currently cover secondary fund modeling or analysis.