Green Street's NAV-based Pricing Model
Overview: Our NAV-based pricing model has served as our primary tool for valuing REITs since 1989. The model separately evaluates the two key determinants of value for a REIT: the net value of its real estate portfolio and the ability of management to add to (or detract from) that value.
Why use NAV? By separating the analysis of the net value of the portfolio from the present value of future investment opportunities, investors are better able to value the entire entity. REITs happen to be one of the few investment vehicles that lend themselves well to an exercise of this sort, as the existence of an active and liquid market for real estate accords an opportunity to derive a reasonably precise estimate of the net value of in-place assets.
The Link between NAV and Share Values: The model generates warranted premiums to asset value by assessing each REIT on a variety of key variables. REITs that stack up well on these variables should trade at relatively large premiums to asset value (and vice versa). Franchise value, the most important of these variables, is objectively assessed by measuring the value creation track record for each REIT, although subjective input as to whether past performance is a good predictor of future performance also plays a big role. The other variables in the model include corporate governance, share liquidity, overhead and leverage. Warranted asset value premiums generated by the model are applied to our estimate of NAV to generate warranted share prices for each REIT.
How We Use this Model: At any given point in time, roughly 25% of the companies we follow are ascribed Buy ratings, 50% are rated as Holds, and 25% are Sells. Because of that discipline, the model is designed to provide relative valuation conclusions, and is neutral with regard to overall REIT valuations, as well as property sector valuations. While our NAV-based model is our primary tool for assessing relative valuations across companies, we use a Discounted Cash Flow (DCF) model
Limitations: We utilize other approaches toward assessing overall REIT valuation (see our REIT Pricing Thermometer, published each month in the Real Estate Securities Monthly) and property sector valuation (see Property Sector Valuation, published every six months). These other approaches are designed to help investors who are more focused on absolute valuation levels and/or relative valuations across property sectors.