Net asset value calculation
I have two questions, which I hope someone can kindly clarify for me.
1. I often see developers' relative valuations being expressed on a discount/premium-to-net asset value basis. NAVs are in turn based on independent appraisal of the developer's portfolio value.
Is that valuation metric more relevant for REIT-type businesses (build/buy-and-let), rather than homebuilders (build-and-sell)? or can it be used across the board?
I am hesitant to use P/E (or other measures based on "recognized" figures) for build-and-sell type developers, due to the time lag between when pre-sales are made and when corresponding revenue is recognized (varies from 1-2 yrs). I feel this lag renders accounting figures incomparable between different companies. This is especially relevant for China and certain emerging market countries where developers are highly dependent on pre-sales (I do not know what industry practice is in US/WE).
can anyone enlighten me on what measure is more appropriate, as I can't find a consensus between different research reports I am reading right now.
2. Assuming independent appraiser arrives at portfolio value using DCF, to arrive at NAV for the whole firm, I use the following calculation
= estimated portfolio market value minus net debt
That is, in arriving at NAV above, I should NOT subtract from portfolio value the balance of operating liabilities (shown on GAAP/IFRS statements), as they are already reflected in estimated portfolio value and I will be double counting if I do so.
My logic is that DCF valuation of portfolio (essentially an NPV figure before financing) already reflects any operating liabilities associated with projects in portfolio, INCLUDING advance payments from customers, if any.
I really hope this does not sound confusing. As usual, I would be very grateful for any thoughtful input.
Your truly,
Good questions. There's a
Good questions. There's a lot here and it will be difficult to cover, but hopefully I can give you a quick overview.
When you buy a REIT, you are truly buying a portfolio of real estate assets, so understanding the underlying value of that real estate (NAV) is tantamount to understanding the value of the REIT. That's why NAV is such a crucial component of REIT valuation. Yes, there is some platform value to a REIT (perhaps it can operate real estate more efficiently and extract greater revenues through tenant relationships) that warrants a premium (or a discount, in the case of poor management, excess leverage, etc.) to NAV, but NAV is often the basis of your analysis.
Homebuilders are much trickier, and I'll note that I have less experience with them, but I can tell you the business is fundamentally different. When you buy a homebuilder, you are not just buying the property portfolio (which is generally its pipeline of develop-able land and inventory of unsold housing stock), but also the ongoing value of the business on the assumption that it can, over the long run, sell houses at a higher price than it costs to build them, not unlike the concept that McDonald's can sell a Big Mac for greater than the cost to make one. However, a homebuilder is not quite like McDonald's either. There is an active secondary market for houses (fortunately there is no such market for leftover Big Macs), and at times (like the past few years) there is so much secondary inventory of housing that development is unprofitable and makes little sense. As a result, the value of future opportunities is incredibly lumpy. So to some extent, the value of a homebuilder is anchored in the NAV of its current property portfolio, but in a market where development is profitable, you have to ascribe considerable value to future profits outside of the current pipeline.
Your second question is essentially what operating assets and liabilities should be credited or debited against the value of underlying real estate to get to NAV. This gets complicated. In theory, the idea of NAV and its predecessor before deducting net debt, which is Gross Asset Value (GAV), is that it should proxy the value of the real estate if you had to sell it on the private market today. So the question is, based on the method you used to get to the portfolio's underlying value to a private buyer, what operating assets would you likely get to keep and what liabilities would you remain obligated to pay? Generally speaking, there are local customs regarding the pro rationing of a property's operating assets and liabilities in a sale. Typically, but not always, a buyer of the real estate will give the seller a credit for operating assets like security deposits, prepaid expenses, etc., but deduct for operating liabilities. In other words, conventional portfolio valuation methods most likely DO NOT adequately account for operating assets and liabilities, so you should add the value of "Net Tangible Assets" (operating assets minus operating liabilities) to your portfolio value before subtracting net debt to arrive at NAV. Make sense?
This is very different from how you do a comparison between public companies. When you compare public companies, you assume that the firm value incorporates the net value of the operating assets minus operating liabilities because a firm deserves credit for being able to reduce its capital intensity and operate with less net working capital (higher operating liabilities, lower operating assets). This is irrelevant, however, in an NAV calculation, which values the portfolio as if it is being disposed rather than treating it like an ongoing business.
re-ib-ny thank you v. much
re-ib-ny thank you v. much for your insight! Very informing and to the point.
Real estate analysis can get rather hairy as I begin to discover :)
Self guided missile