Lawrence Meyers: 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.
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.