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There are many ways to value a real estate investment trust (REIT). One of the methods is to examine the net asset value of the REIT. The net asset value, or NAV, is often calculated incorrectly, so it’s worth clearly defining it.
Calculating NAV requires first that we figure out a way to appraise the value of a REIT’s real estate holdings. The best way to do this is to figure out how much money the holdings generate in operating income, and to do so by capitalizing it based on a market rate.
If the market’s present cap rate for this REITs holding is X%, then our estimate of the building’s value becomes operating income divided by X%. This market value estimate replaces the book value of the building. Then we deduct mortgage debt to get net asset value. Assets minus debt equals equity, where the “net” in NAV means net of debt. The final step is to divide NAV into common shares to get NAV per share.
If the stock price is below NAV, then we are getting the company at a cheaper price than the actual market value of its assets.
Undervalued REITs
Kimco Realty Corp. (NYSE: KIM) has a very broad base of operations. It handles leasing, redevelopment, restaurants, specialty leasing, acquisitions and dispositions. It’s North America’s largest publicly traded owner and operator of open-air shopping centers, with owned interests in 745 shopping centers comprising 108 million square feet of leasable space across 39 states, Puerto Rico, Canada, Mexico and Chile.
Kimco is basically aiming to be the gorilla of neighborhood and community shopping centers. It has been disposing of lesser-quality assets and acquiring larger, higher-quality properties and pursuing redevelopment opportunities. Kimco is really accelerating the rate at which it is dumping assets so it can redeploy its capital more efficiently, and deleverage itself.
It trades at $24.33 per share, with an estimated NAV of between $25 and $26.
My favorite selection is Ashford Hospitality Trust (NYSE: AHT). It is the most solid hotel REIT out there. Ashford is incredibly well-managed, and the market simply has not rewarded the stock as it should, even though it has outperformed its peer average in hotel REITs annually over the past 10 years.
Ashford has also outperformed every benchmark since its 2003 IPO, as well as during the last one-, three- and five-year periods. Yet there remains much more upside.
While most hotel REITs cancelled their common and preferred dividends during the housing crisis, Ashford continued its preferred payments. Other hotel REITs were in danger of bankruptcies because of their debt maturities. Ashford repeatedly refinanced maturities and balances. This is all a testament to management’s ability to manage capital and remain a dividend stock for the long term.
Ashford also has the highest insider ownership, by far, of its peers. A full 18% of shares are held by insiders. The nearest competitor has only 4% held by insiders. It trades at $8.63, yet its NAV is close to $12. It pays a 5.5% yield.
It’s a bit odd, but Acadia Realty Trust (NYSE: AKR) is actually trading at its NAV, but normally trades at 12% premium to its NAV. In that regard, I consider it a value play.
It engages in the ownership, acquisition, redevelopment and management of retail properties – not unlike the same neighborhood and community shopping centers of Kimco, but also with mixed-use properties with retail components.
It has some kind of interest in 87 properties, primarily in the Northeast, Mid-Atlantic and Midwest, totaling approximately 5.4 million square feet. The properties are in 12 states and the District of Columbia and are 96% occupied. Acadia pays a 3.1% yield.
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