
Green Street’s Time-Tested Approach to REIT Net Asset Value (NAV)
Our Net Asset Value-based model serves as the backbone of Green Street’s proprietary stock recommendations with a proven track record for 20 years.
Download Full MethodologyWhich Real Estate Investment Trusts (REITs) are cheap?
Green Street Advisors’ research is rooted in our unparalleled knowledge of real estate fundamentals and valuations across the public and private markets. We have a profound understanding of the portfolios owned by real estate investment trusts (REITs) and the markets in which they operate. Our valuation methodology is based on a relative model and is designed to identify the REITs that are most- and least-attractively valued.
Assess Current Market Value
Extensive quantitative and qualitative analyses to assess the current market value of each company’s assets and liabilities. This is distilled into an estimate of net asset value (NAV) per share.
Determine Warranted Share Price
Systematic assessment of a REIT to determine its valuation relative to sector-level peers. This translates into a premium/discount to asset value at which the REIT’s shares should be valued. Applying the warranted premium/discount to the NAV estimate leads to our warranted share price.
Make Recommendations
The warranted share price is compared to the current stock price to form BUY/HOLD/SELL recommendations for the REITs in our coverage universe.
We employ a relative pricing model when conducting our REIT analysis and making our company-specific recommendations. This means that there are an equal number of Buy-rated and Sell-rated stocks within each property sector. Through a multistep process, we identify which REITs are overpriced and underpriced at any point in time, thereby helping our clients make the best possible real estate capital allocation decisions. The effectiveness of the Green Street methodology is demonstrated through the impressive performance of our investment recommendations (View Track Record).
An NAV-based valuation methodology is only as good as the underlying estimate of net asset value. High-quality estimates of marked-to-market valuation require a great deal of effort and resources. Green Street’s analysts focus solely on their analytical work and providing support to our clients. Our team meets regularly with management teams, conducts numerous property tours and talks frequently with public and private market players. A core tenant of our research-driven business model is that we are independent and free from conflicts that arise from banking or brokerage affiliations.
Our model provides a systematic assessment of four key variables – franchise value, balance sheet risk, corporate governance and overhead. While it is designed to be neutral with regard to whether REITs in aggregate are cheap or expensive, investors can employ other Green Street analytic tools to help assess overall valuation and sector allocation recommendations. For example, Green Street’s RMZ Forecast Tool, which assesses overall REIT valuation compared to bonds and stocks, has proven very helpful in identifying periods when REITs are mispriced.
We believe the only way to add real value is to have a supreme understanding of all the issues that impact the value of a property, market or company from both a top-down and bottom-up approach.
Frequently Asked Questions
- Net Asset Value (NAV) estimates are far from precise. It’s very common to see NAV estimates for a given REIT spanning a broad range, with some being as much as 30% higher than others. Why base a model on such an imprecise estimate?
- An NAV analysis is only as good as the cap rate applied to net operating income (NOI). Where does Green Street get its cap rates?
- As the Real Estate Investment Trust (REIT) industry continues to mature, analysts and investors will inevitably value these stocks the same way the vast majority of other stocks are valued. Approaches based on P/E multiples, EBITDA multiples, or discounted cash flow models will take the place of a REIT-centric concept like NAV. After all, no one tries to figure out the NAV of General Motors or Microsoft, so why bother to do so with REITs?
- REITs are more than just a collection of assets. Management matters a lot, and an NAV-based approach can’t possibly factor that in. How does the model incorporate differences in management teams?
- Many REITs own hundreds of properties spread across the U.S., and an asset-by-asset appraisal would take an enormous amount of time. How can an analyst know the value of any given portfolio?
- REITs have broad latitude in how they expense many operating costs. Can an NAV-based approach be fooled if a REIT inflates NOI by moving costs to the General & Administrative (G&A) expense line?
- An NAV analysis derived from real estate NOI seemingly ignores capital expenditures (cap-ex). How does cap-ex factor into the analysis?
- NAV is a backward looking metric. How does that take into account future performance?
Please see disclosure for Green Street's stock recommendations.