Skip to content
All library documents

Valuing REIT Shares from Property NOI and Capitalization Rates

Article Quant Q&A · Author: Ben
Read the original

Summary

The document outlines a property-based method for estimating a REIT’s equity value per share. First calculate net operating income from revenue and expenses before depreciation and interest. Divide that NOI by an assumed capitalization rate to estimate the market value of the underlying buildings. Then subtract the REIT’s debt to estimate equity value, and divide by shares outstanding to derive an estimated share price.

The example supplies financial inputs and a range of office property capitalization rates, but the response does not compute a final valuation. Choosing a cap rate within the range materially affects the estimate, and the method treats property value as the central driver. It does not discuss other assets or liabilities, taxes, development costs, lease risks, cash flows, or a discount for corporate overhead. The result is therefore a simplified asset-based estimate rather than a complete valuation of a traded REIT.

Key ideas

  • Estimate NOI by excluding depreciation and interest from operating expenses.
  • A property’s estimated value can be approximated as NOI divided by its capitalization rate.
  • Subtract debt from estimated property value to derive equity value.
  • Divide equity value by shares outstanding to estimate value per share.
  • The selected cap rate strongly influences the estimate, and the method omits other valuation factors.

Tags

EquitiesUS marketsStatistics
Full text
# What is your estimation for a fair market value for a share of the REIT


# What is your estimation for a fair market value for a share of the REIT












From the question below am having some issues in solving it. I know that Fair Market Value of Assets = Net asset value+Liabilities. However, in this case am dealing with stocks and I need to find the market value for a share. How do I move from what I know to stocks or is it a new concept all together?

Consider a REIT that holds high quality office building in some of the best locations in the U.S. The REIT is currently traded at a price of $65/Share and there are 110 million shares outstanding.

Expected next year total revenue:$680M

Expected next year total expenses (including interest and depreciation):$350M

Expected next year depreciation:$80M

Expected next year interest: $60M

Total Debt: $2.0B

Current Office CAP in the U.S.: 4.5% to 6.0% depending on quality and location.

a. What is your estimation for a fair market value for a share of the REIT described?

## Answer by Alex C (score 0, accepted)

https://quant.stackexchange.com/a/30546

Are you familiar with the concept of 'cap rates' in US commercial real estate? The Cap Rate is a number such that the Market Value of the building is equal to the NOI (net operating income) divided by the cap rate. Estimates of cap rates for various kinds of buildings are publicly available (and included in the problem statement here).

Start by computing the NOI (which is income before depreciation and interest) from the figures given above and divide it by 0.045 (high quality cap rate of 4.5%) to get the building MV. You know the REIT Debt is 2 billion so find the value of the REIT equity by subtraction. Debt+Equity = MV . Finally divide the Equity by the number of shares to find the price per share.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.