Disclosing Net Asset Value
When investors talk, publicly traded companies listen. A number of real estate companies
have responded to investor and analyst interest by disclosing their calculation of net asset
value (NAV) on a per-common-share basis. Investors and analysts look to a real estate
company's per-share NAV and the relationship of this value with the market value of the
company's common stock as a way to determine whether the shares are trading at a
premium or discount to the value of net assets underlying "shareholders' equity."
In addition, investors and analysts can evaluate a company's historic NAV growth and the
past relationship of NAV per share with the company's common stock price. The results
of this analysis can also be used for peer group and sector comparisons.
However, as the article "An Inexact Science" in this issue points out, estimating NAV
may be done in more than one way. Described below are current practices in calculating
and reporting NAV and suggestions for appropriate disclosures.
NAV Components
Although much of the data an investor or analyst requires to calculate NAV is available
in a company's financial statements or notes, many companies are facilitating the process
by presenting their own calculations and by showing the components and assumptions
used within quarterly supplemental operating and financial reports. Some of the
companies that have disclosed their NAV components and/or calculations include:
Acadia Realty Trust (NYSE: AKR), Apartment Investment & Management Co.
(NYSE: AIV), Archstone-Smith (NYSE: ASN), First Industrial Realty Trust, Inc.
(NYSE: FR), Home Properties of New York, Inc. (NYSE: HME), ProLogis (NYSE:
PLD), Sun Communities, Inc. (NYSE: SUI) and United Dominion Realty Trust
(NYSE: UDR).
There are several figures common in a typical NAV calculation. The components
generally include: net operating income (NOI) generated by the consolidated property
portfolio; cash flows from properties owned in unconsolidated subsidiaries; management
or other fee income; values for other assets; liabilities; preferred stock (if any); and the
number of diluted common shares and operating partnership units outstanding at the
valuation date. In some cases, property NOI and cash flows are categorized by property
type and/or location.
The NOI used as a basis for valuing properties generally represents a 12-month-forward
estimate, adjusted for portfolio occupancy normalization, as well as straight-line rents, if
applicable. Additional adjustments may reflect normalized capital expenditures,
dispositions, acquisitions and developments added to the operating portfolio, or other
changes in NOI from the existing portfolio. Management or other fee income generally
represents cash flow from short-term contracts.
Other assets would include development projects, land held for future development or
sale, other investments in unconsolidated subsidiaries, cash and cash equivalents, and
miscellaneous items. The value of properties under development typically reflects the
historical cost-carrying amount adjusted to reflect potential increases or decreases in
value depending on the outlook for the projects' success. The value may be estimated
based on projected net cash flows and current investor yield requirements for the related
assets. Land that is held for development or sale may be similarly valued. Any remaining
assets, as well as liabilities and preferred stock, are usually included in NAV at historical
cost net book value.
The number of common shares and operating partnership units would be measured on a
diluted basis at the date of valuation, reflecting any convertible securities that would
dilute earnings per common share if converted.
NAV Calculation
As shown in the accompanying table, the first step in calculating NAV is to estimate a
value for the consolidated property portfolio by applying a capitalization rate to NOI. A
similar calculation is made for the cash flows generated by properties owned in
unconsolidated subsidiaries. The capitalization rate, which is derived from recent market
transactions and represents current investor yield requirements, is adjusted to reflect the
characteristics of a company's portfolio. Relevant characteristics include property type,
class, age, and location, as well as the quality of in-place leases/tenants. In some cases, a
capitalization rate may be developed based on characteristics of individual or groups of
properties. To take into account capital expenditures, companies may either adjust NOI or
the capitalization rate.
Sample NAV Components and Calculation
($ in thousands)
NOI – Forward 12-month estimate $345,678
Adjustment for straight-line rents (if applicable) (12,345)
NOI from property portfolio* $ 333,333
Divide by NOI capitalization rate 8.5%
Value of property portfolio $3,921,565
Management or other fee income $9,876
Divide by appropriate capitalization rate 20.0%
Value of management or fee income $49,380
Add other assets:
Development projec $654,321
Land held for future development or sale $123,456
Other investments in unconsolidated
subsidiaries
$56,789
Cash and equivalents $45,456
Other miscellaneous assets $54,321
Gross value of assets $4,905,288
Deduct:
Total liabilities
$1,889,899
Preferred stock $150,000
Net Asset Value $2,865,389
Divided by total diluted common
shares/operating partnership units 123,456
Net Asset Value per share $23.21
Sensitivity analysis:
Net Asset Value per share based on NOI
capitalization rate 50 basis points higher than
calculated above $ 21.45
Net Asset Value per share based on NOI
capitalization rate 50 basis points lower than
calculated above $ 25.20
* Operating properties, including properties owned in unconsolidated subsidiaries
The next step in calculating NAV would be to estimate a value for the management or fee
income by applying a capitalization rate to projected cash flows.
The values for all other assets are added to the estimated value of the property portfolio
and management or fee income to calculate the gross value of the company's assets. Then
total liabilities and preferred stock are deducted to arrive at the net value of the
company's assets. Finally, total diluted common shares/operating partnership units are
divided by the NAV to determine NAV per share.
Cautions and Conclusions
Some observers have cautioned against relying on NAV because the estimate is based on
a degree of subjectivity. Others suggest that NAV is a necessary analytical tool because a
real estate company's net assets measured by depreciated historical cost is irrelevant to an
analysis of the relationship between the company's underlying net assets and its common
share price.
To enhance the reliability of property valuations, actual operating results generated in
periods immediately preceding the valuation date are generally used to calculate 12-
month-forward NOI estimates. To compensate for the subjectivity of capitalization rate
selection, a company could provide a sensitivity analysis of the NAV calculation. For
example, the analysis could calculate per-share NAV using a range of capitalization rates
that would provide a per-share NAV range based on reducing or increasing capitalization
rates by 25 or 50 basis points.
Another consideration in the analysis of NAV is that the calculation usually looks at only
one point in time and therefore may exclude important company transactions. This can be
addressed by making adjustments for the potential impact on NAV from recent or
pending acquisitions, dispositions, and debt or equity financing transactions. By applying
qualitative judgment to quantitative analysis, NAV can be one of many tools available
from an investor's or analyst's toolbox used to evaluate the investment quality of a real
estate company's common shares.
When investors talk, publicly traded companies listen. A number of real estate companies
have responded to investor and analyst interest by disclosing their calculation of net asset
value (NAV) on a per-common-share basis. Investors and analysts look to a real estate
company's per-share NAV and the relationship of this value with the market value of the
company's common stock as a way to determine whether the shares are trading at a
premium or discount to the value of net assets underlying "shareholders' equity."
In addition, investors and analysts can evaluate a company's historic NAV growth and the
past relationship of NAV per share with the company's common stock price. The results
of this analysis can also be used for peer group and sector comparisons.
However, as the article "An Inexact Science" in this issue points out, estimating NAV
may be done in more than one way. Described below are current practices in calculating
and reporting NAV and suggestions for appropriate disclosures.
NAV Components
Although much of the data an investor or analyst requires to calculate NAV is available
in a company's financial statements or notes, many companies are facilitating the process
by presenting their own calculations and by showing the components and assumptions
used within quarterly supplemental operating and financial reports. Some of the
companies that have disclosed their NAV components and/or calculations include:
Acadia Realty Trust (NYSE: AKR), Apartment Investment & Management Co.
(NYSE: AIV), Archstone-Smith (NYSE: ASN), First Industrial Realty Trust, Inc.
(NYSE: FR), Home Properties of New York, Inc. (NYSE: HME), ProLogis (NYSE:
PLD), Sun Communities, Inc. (NYSE: SUI) and United Dominion Realty Trust
(NYSE: UDR).
There are several figures common in a typical NAV calculation. The components
generally include: net operating income (NOI) generated by the consolidated property
portfolio; cash flows from properties owned in unconsolidated subsidiaries; management
or other fee income; values for other assets; liabilities; preferred stock (if any); and the
number of diluted common shares and operating partnership units outstanding at the
valuation date. In some cases, property NOI and cash flows are categorized by property
type and/or location.
The NOI used as a basis for valuing properties generally represents a 12-month-forward
estimate, adjusted for portfolio occupancy normalization, as well as straight-line rents, if
applicable. Additional adjustments may reflect normalized capital expenditures,
dispositions, acquisitions and developments added to the operating portfolio, or other
changes in NOI from the existing portfolio. Management or other fee income generally
represents cash flow from short-term contracts.
Other assets would include development projects, land held for future development or
sale, other investments in unconsolidated subsidiaries, cash and cash equivalents, and
miscellaneous items. The value of properties under development typically reflects the
historical cost-carrying amount adjusted to reflect potential increases or decreases in
value depending on the outlook for the projects' success. The value may be estimated
based on projected net cash flows and current investor yield requirements for the related
assets. Land that is held for development or sale may be similarly valued. Any remaining
assets, as well as liabilities and preferred stock, are usually included in NAV at historical
cost net book value.
The number of common shares and operating partnership units would be measured on a
diluted basis at the date of valuation, reflecting any convertible securities that would
dilute earnings per common share if converted.
NAV Calculation
As shown in the accompanying table, the first step in calculating NAV is to estimate a
value for the consolidated property portfolio by applying a capitalization rate to NOI. A
similar calculation is made for the cash flows generated by properties owned in
unconsolidated subsidiaries. The capitalization rate, which is derived from recent market
transactions and represents current investor yield requirements, is adjusted to reflect the
characteristics of a company's portfolio. Relevant characteristics include property type,
class, age, and location, as well as the quality of in-place leases/tenants. In some cases, a
capitalization rate may be developed based on characteristics of individual or groups of
properties. To take into account capital expenditures, companies may either adjust NOI or
the capitalization rate.
Sample NAV Components and Calculation
($ in thousands)
NOI – Forward 12-month estimate $345,678
Adjustment for straight-line rents (if applicable) (12,345)
NOI from property portfolio* $ 333,333
Divide by NOI capitalization rate 8.5%
Value of property portfolio $3,921,565
Management or other fee income $9,876
Divide by appropriate capitalization rate 20.0%
Value of management or fee income $49,380
Add other assets:
Development projec $654,321
Land held for future development or sale $123,456
Other investments in unconsolidated
subsidiaries
$56,789
Cash and equivalents $45,456
Other miscellaneous assets $54,321
Gross value of assets $4,905,288
Deduct:
Total liabilities
$1,889,899
Preferred stock $150,000
Net Asset Value $2,865,389
Divided by total diluted common
shares/operating partnership units 123,456
Net Asset Value per share $23.21
Sensitivity analysis:
Net Asset Value per share based on NOI
capitalization rate 50 basis points higher than
calculated above $ 21.45
Net Asset Value per share based on NOI
capitalization rate 50 basis points lower than
calculated above $ 25.20
* Operating properties, including properties owned in unconsolidated subsidiaries
The next step in calculating NAV would be to estimate a value for the management or fee
income by applying a capitalization rate to projected cash flows.
The values for all other assets are added to the estimated value of the property portfolio
and management or fee income to calculate the gross value of the company's assets. Then
total liabilities and preferred stock are deducted to arrive at the net value of the
company's assets. Finally, total diluted common shares/operating partnership units are
divided by the NAV to determine NAV per share.
Cautions and Conclusions
Some observers have cautioned against relying on NAV because the estimate is based on
a degree of subjectivity. Others suggest that NAV is a necessary analytical tool because a
real estate company's net assets measured by depreciated historical cost is irrelevant to an
analysis of the relationship between the company's underlying net assets and its common
share price.
To enhance the reliability of property valuations, actual operating results generated in
periods immediately preceding the valuation date are generally used to calculate 12-
month-forward NOI estimates. To compensate for the subjectivity of capitalization rate
selection, a company could provide a sensitivity analysis of the NAV calculation. For
example, the analysis could calculate per-share NAV using a range of capitalization rates
that would provide a per-share NAV range based on reducing or increasing capitalization
rates by 25 or 50 basis points.
Another consideration in the analysis of NAV is that the calculation usually looks at only
one point in time and therefore may exclude important company transactions. This can be
addressed by making adjustments for the potential impact on NAV from recent or
pending acquisitions, dispositions, and debt or equity financing transactions. By applying
qualitative judgment to quantitative analysis, NAV can be one of many tools available
from an investor's or analyst's toolbox used to evaluate the investment quality of a real
estate company's common shares.
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