REITs:  Book Value and Net Asset Value Revealed

What’s not to love about Real Estate Investment Trusts (REITs)?  You probably know I’ve written about REITs before.

REITs are best understood as a professionally managed trust that buys and holds real estate properties.  They offer investors (like you and me) a way to participate in real estate, including the potential rise in property values, without the headaches of being a landlord.  REITs are an attractive asset class to me because these companies provide regular distributions, often monthly distributions.  For investors that want to hold real estate as part of their portfolio but don’t want to deal with phone calls from cranky tenants, REITs can be an excellent alternative.  I hold a few of them actually.  Today’s REITs offer some juicy yields for good value within Canadian’s favourite financial topic:  real estate.

With all the positives that can come with owning REITs, there are some downsides and things to be cautious of as well.  For one, interest rate exposure immediately comes to mind for me as a long-term investor – as rates come down or go higher you would expect to get more cash flow yield or less cash flow yield out of Canadian REITs respectively.  You already know where rates are today; they will likely go up, when I don’t know..

Another downside to owning REITs is the accounting headaches that come with the REIT structure.  REITs are not generally required to pay Canadian income tax if they distribute all of their net income for tax purposes on an annual basis, so that tax is passed on to you and me, the investor.  For this reason, I suggest owning REITs in registered accounts such as RRSPs, RRIFs, RESPs, and TFSAs.

The analysis of REITs can also be some tricky stuff, particularly when it comes with understanding the differences between Book Value and Net Asset Value.  Today’s post will get into the technical world of this without making your head spin.

In order to examine the differences between the two metrics, we first need to understand what each term actually means.

Book Value involves the historical cost of assets held on the balance sheet and is primarily an accounting metric, which includes provisions such as depreciation.  As history has shown many of us who live in Canada, depreciating values for housing are not necessarily the most accurate representation for real estate. This is where the Net Asset Value (NAV) calculation comes in handy.  NAV considers the market value of assets held by a REIT.  NAV can be a great way to gauge how realistic a REIT price is since this helps to act as an anchor that keeps valuations in the realm of reality.  Going a step further, a REIT can be justifiably priced at a premium or discount after the NAVPS is calculated.

Calculating the book value is fairly simple.  We look at the equity value in the balance sheet to find this number.

Calculating NAVPS is a bit more complicated, we need to know this stuff:

  • Net operating income (NOI) – This is the properties rental income after expenses and vacancies are accounted for.
  • Capitalization rate – This is similar to the cost of equity or a required return the investor wants.
  • Liquid assets – Essentially cash, cash equivalents and receivables.
  • Liabilities – Includes value of debt.
  • Shares outstanding – Found in the financials.

Step 1 – Dividing the Net Operating Income (NOI) by the capitalization rate provides us with an estimated value of the real estate.

Step 2 – After this, we add the liquid assets (cash and receivables) and subtract the liabilities to find the NAV and divide this number by the shares outstanding in order to find the NAVPS.  It looks like this:


[(NOI/Cap-rate) + Cash and receivables – Liabilities]


Shares Outstanding

Investors can take the NAVPS number and compare it to the REIT price and decide how far off the valuation is and whether the price is justified.

The differences between a Book Value per share calculation and a Net Asset Value per share calculation are fairly small but the difference in valuation can be quite large when comparing these metrics amongst the REIT prices in question.

For the average investor, my take is, you probably don’t need to worry about these details.  In fact, just buy a REIT ETF for your RRSP and TFSA and watch it provide steady income for the years to come.   You’re done.

For the advanced investor, one that enjoys doing some financial analysis and some metrics for REIT comparison purposes you may want to perform some of this research.  With this post, now you can.

I want to thank my friend Ryan, Managing Partner at 5i Research, a company that is a fan of My Own Advisor, who offers conflict-free investment research.

How do you invest in REITs?  Do you own some REITs directly like I do, including a REIT ETF?

My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.

24 Responses to "REITs:  Book Value and Net Asset Value Revealed"

  1. Can anyone say which Canadian REITs are most attractive for taxable accounts? Larger ROC? I am up to my limit in my registered accounts, but still want to take advantage of the low share price to NAV right now.

    I hold HR, SRU, REI, SOT, FCR, D, MRT, and MRG. I’ve been hurt bad by holding D and MRT for a few years, but the others are recent buys.

    1. I personally avoid REITs in the taxable account due to the return of capital, interest payments, distribution, etc. headaches and on top of that, calculating the adjusted cost base.

      I only keep my REITs in tax-sheltered accounts (TFSA, RRSP) for that reason.

      That said, hard to know what the future holds. Thinking industrial REITs might still be a good idea?? Thoughts Brent? I’ve been hurt by REI.UN as well. Down quite a bit this year but still holding on….DRIPping it every month.

      1. Right now I’m most interested in large diversified REITS like REI, HR, SRU as a value play and I have some assurance they will be get through the current crisis okay. The retail and office REITs are inexpensive now, with share prices to NAV discounts of 50%. I’ve used up all my RRSP room, and because I’m a dual Can/U.S. citizen, TFSA is a no-no. So, there is just my margin account for investments now. I have someone do my taxes, so having the accountant do the extra work isn’t a big deal, although just the cost of having someone do my taxes for Can and U.S. is now $1500.

        1. Gotcha. I know I invest in RioCan and Smart REIT and will continue to hold. Not advice, just want I do. REITs have definitely been battered and it ain’t over yet!!

          Good on you for the accountant. Gotcha about dual citizen stuff and I can appreciate that is complex. I think some REITs are a value-play for sure. I wish I could predict the future for you Brent. Wild days for sure. Hang on and stay diversified! I have a few reader questions to reply to and will answer some of this stuff over time.


  2. Hello Sir! It would be much appreciated if you could elaborate on what receivables do I have to look at? Based on the balance sheet of the ”WELLTOWER INC” we see numerous types listed i.e. : Real estate loans receivable ; Less allowance for losses on loans receivable ; Net real estate loans receivable ; Straight-line receivable ; Receivables and other assets. What am I to use in my NAV measurement?
    Thank you.

    1. Don’t quote me on this one…but…I believe NAV = Net asset value (NAV) is the value of an entity’s assets minus the value of its liabilities. NAV is normally quoted “per investment unit” for REITs, where the value is divided by the number of total outstanding investment units.

      1. Thank you, I am still in the dark about what to use though. Apparently NAV valuation should be left to professionals as each company has its own lines of different receivables and various liabilities which I find hard to navigate around. It was supposed to be easy until I open SEC filings. Formula is straightforward, but items listed on the filings are not.
        Thanks a lot.

        1. Yeah, and to make it worse, I believe each company does their accounting somewhat different even with GAAP rules. I wish I could give you a straight-forward answer. Have you considered emailing the investor relations group associated with any particular stock? They are usually happy to give shareholders details. Cheers.

  3. The REITS in my registered accounts show:

    BOX.UN Return of Capital (for 2013) 51%

    HR.UN 53%

    NPR.UN 33%

    BPY.UN 0%

    Good enough reason to hold them as registered, but the lesson really is you have to do your own homework to make a reasoned decision.


  4. Mark,

    Not to belabour the point but here are the 2013 ROC for my REITs

    AX.UN 88%
    CSH.UN 78%
    CRR.UN 90%
    D.UN 54%
    NWH.UN 100%

    Other than D.UN at 54%, the other REITS are very tax efficient.

    Love the site.


      1. Hi Mark,
        I have my doubts!

        The reason I own this REIT is for the distribution. The average market return over the years has been around 8%. With D.un’s distribution at 7.74%, I have already earned the market return as long as the unit price stays constant or goes up a little.

        According to the “people in the know” the office space area is not the place to be for the next couple of years. That’s OK with me as long as the unit price doesn’t fall much and the distributions continues. Sometime in the future it will be the area to invest in.

        In my opinion, the distribution is safe and the unit price is already way down. The units are trading well below net asset value. It’s a keeper for me.

        What are your thoughts?


        1. I could see D.UN with some capital appreciation but not without some challenges. Hopefully the distribution will stay where it is, I think it will. Office space will always be needed but it might not be in the quantities required of the past, some companies are moving away from “bricks and mortar” entities – a more mobile and virtual workforce I think is the way of the future. We’re not there yet.

          D.UN is a keeper with yield over 7%.

          Good to hear from you John,

  5. Great info. I wish there were much cheaper Reit funds available in Canada as I would use them much more compared to holding individual reits. They are all over .50 mer which is ridiculous considering most funds hold no more than 10 Reits. Like many things in Canada we get the short end of the stick.

    Good Day and Grind On!

    1. Agreed, with the MERs, which is why I have chosen over time as my portfolio grows to unbundle the REIT ETFs. I figure there is no point owning the same stocks the ETF holds, and paying fees for that when I don’t have to!

      Thanks for the comment.

  6. Mark, I support the notion of holding REITs in a registered account. I have held them in a cash account and got slaughtered with the tax bill as for most of them “other income” is the majority of the payout and treated the same as interest. ROC always seems to be the smaller portion so it’s not enough to be worthwhile having in cash. Less messy accounting too if you do your own taxes.

    Thanks for this informative article.

    1. This is always what I’ve feared Spanky, getting clobbered on the “other income” more so than I’m getting hit now. You’re most welcome for the article – glad you liked it.

  7. Mark,

    I disagree with putting REITs in a registered account. The distributions for many REITS are considered return of capital and is not tax immediately. When it is taxed it will be taxed as capital gains at lower rates. This tax treatment is lost in the registered accounts.

    Just my opinion.


    1. True enough John but I figure I don’t even need to worry about ROC, interest or capital gains by holding REITs in registered accounts. No guesswork and no tax math. It makes things simple for me, and I like simple.

      How about you, where do you hold your REITs?

      Thanks for the comment,

      1. Mark,
        I require the income from my REITS to live on, so they are held in my regular account.

        There is nothing easy about investing on your own. If you are unable to keep track of your ACB’s and personal tax situation, then I suggest you may want to pay someone to do it for you!

        Making things simple is not always the best alternative. Saving money in the long term is.


        1. Great to hear back from you John, and your point is well taken – if you cannot and do not want to track investments for tax purposes, then yes, potentially pay someone else.

          I appreciate the comments and continued success with the REITs. Hopefully we’ll continue to see strong yields.

  8. Hey Mark,

    Just took a look at your ‘Top Canadian REITs’ post from December 2011. There you recommended REI and HR, are these still your picks as of today? Any other you’d want to inform your readers about?

    With REIT ETFs you have that large MER (ZRE carries a 0.55% MER), and so I would love to drop my position in it and start buying these REITs directly.

    1. Hey Prasanna,

      Thanks for reading that old post! I do own both REITs and have no intention of selling them. Those REITs aren’t direct advice as you know, just considerations for more research by you and others.

      I also had the same thought a long time ago, forget the higher MER charged by REIT ETFs and just hold the REITs individually. I’ve done that for a few years now with no intention of holding more REIT ETFs in my personal portfolio.


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