I have a question that I hope someone can help to clarify.
There are some reits that are trading below NAV ( Saizen, FCOT ). My question is what is the relevance of NAV when evaluating a REIT? Some people are attracted to REITS trading at a discount to NAV, but what is the use of that if the yield is lower than other REITS?
(13-05-2012, 05:33 PM)touzi Wrote: I have a question that I hope someone can help to clarify.
There are some reits that are trading below NAV ( Saizen, FCOT ). My question is what is the relevance of NAV when evaluating a REIT? Some people are attracted to REITS trading at a discount to NAV, but what is the use of that if the yield is lower than other REITS?
Thank you.
NAV is but just 1 of the variable to look at. There are so many other things. Let me try to attach an article published by The Pulse magazine(now no more in circulation). It cover the many variables very well.
I guess I am not asking the right question. After reading part of the article, what I should be asking is why despite trading at a substantial discount to NAV, Saizen and FCOT still has a lower yield compared to many other REITS? If valuation is dependent on demand, which also influences rental income, shouldn't a REIT that trades at a discount to NAV be of higher yield?
touzi Wrote:If valuation is dependent on demand, which also influences rental income, shouldn't a REIT that trades at a discount to NAV be of higher yield?
Valuation is also dependent on the capitalization rate (cap rate) used on the property. Typically, industrial properties are given a higher cap rate than office properties, so even though 2 properties could generate exactly the same net rent, different cap rates would result in different valuations. So the office REIT could trade below its NAV and still generate a lower yield than an industrial REIT.
The location of the property also makes a difference. A property in a country with high interest rates e.g. India would have a higher cap rate than one in a country with low interest rates e.g. Japan.
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I do not give stock tips. So please do not ask, because you shall not receive.
Nav is the indication of net worth of the property.
Earning is how well the management can leverage it's assets.
I was thinking back this question as suppose to if I were to buy a condo, how much am I paying. Effectively I'm paying for the nav, cus of leverage of 80% from bank, 20% downpayment. Which means nav is 20%. Generating return base on rental, do they give u a good amount that u want to invest.
My consideration was 8% or more return for nav invested after reducing all the interest paid.
So applying this back into reits, I look at nav,earnings, and dividend as a potential to valuate higher.
The NAV of a REIT (assuming it is recently updated) is essentially someone's (presumably a knowledgeable person) opinion of how much the property is worth assuming the market is fully liquid and it neglects pricing the debt of the reit.
The key assumptions (I would say) are:
- the cost of debt is just the notional value of the debt. In practice, i would think you'd need to revalue the debt using current interest rates as well as the credit worthiness of the REIT. In other words you should treat it like a short bond. e.g the reit has 100 million of debt at interest rate of 3% for 5Y. You should value its debt like a 100 million bond at the current interest rates which similarly credit worthy companies can get. Assuming you are a retail investor, this could be difficult, but some intelligent guesses can be made. Bond calculators abound on the internet.
- That the market is deep and liquid enough to express a healthy interest in buying your building.
- That there are enough comparables to your REITs buildings and that your buildings are not too infungible. e.g. if you own a cold storage warehouse, it obviously is suitable only for that purpose unless someone, at great cost, converts it.
Cap rates are just another way of specifying your comparables, just like bond prices can be indirectly specified by their yield to maturity.
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