REIT Valuation Methods
REIT Valuation is commonly performed by analysts using the following 4 approaches:
- Net asset value (“NAV”)
- Discounted cash flow (“DCF”)
- Dividend discount model (“DDM”)
- Multiples and cap rates
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How to Determine the Value of REITs?
Companies operating in industries like technology, retail, consumer, industrials, and healthcare are valued using cash flow or income-based approaches, like the discounted cash flow analysis or Comparable Company Analysis.
By contrast, the Net Asset Value (“NAV”) and dividend discount model (“DDM”) are the most common REIT valuation approaches.
So, what’s different about REITs?
With these other types of companies, the values of the assets that sit on their balance sheets do not have efficient markets from which to draw valuations.
If you were to try to value Apple by looking at its balance sheet, you would be grossly understating Apple’s true value because the value of Apple’s assets (as recorded on the balance sheet) are recorded at historical cost and thus do not reflect its true value.
As an example, the Apple brand – which is extremely valuable – carries virtually no value on the balance sheet.
But REITs are different. The assets sitting in a REIT are relatively liquid, and there are many comparable real estate assets constantly being bought and sold. That means that the real estate market can provide much insight into the fair market value of assets comprising a REIT’s portfolio.
In addition, REITs have to pay out nearly all of their profits as dividends, making the dividend discount model another preferable valuation methodology.
REIT Valuation: What are the 4 Methods?
REIT Type | Description |
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Net asset value (“NAV”) |
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Discounted cash flow (“DCF”) |
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Dividend discount model (“DDM”) |
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Multiples and cap rates | The 3 most common metrics used to compare the relative valuations of REITs are:
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The NAV valuation is the most common REIT valuation approach. Below is the 7-step process for valuing a REIT using the NAV approach.
We should use the Financial Debt or all the liabilities?
Alberto:
Under the NAV approach, you should deduct out all liabilities.
Best,
Jeff
Agree with Jeff