Assume you are the senior investment officer of an upstart real estate securities fund (“Fund”). The Fund seeks to maximize total return through both current income and capital appreciation by investing in real estate securities, primarily real estate investment trusts (“REITs”). The fund is deciding whether or not to make a new investment into Simon Property Group (SPG)
In light of the fund’s total return objective, you need to consider the stock’s current premium or discount to Net Asset Value (“NAV”), as well as the outlook for both NAV and the stock price (think, “funds flow & risk premiums”). In calculating the stock’s current NAV, you should use the company’s most recent quarterly financial statements, various appropriate closing stock prices (last trading day of that same quarter, earnings announcement date, and “today”), and your best estimate of an appropriate capitalization rate(s).
Take a Bear approach. Assume that the primary component of total return is appreciation (but don’t ignore the dividend yield), which means the focus (but not exclusively) of your analysis should be on current and projected NAV.
Once you’ve completed your analysis, you should be able to answer the following questions during your investment committee presentation (this is not a checklist but rather, a guideline):
1) Be able to fully support your NAV calculation.
2) How transparent is the company’s financial presentation and how did that impact your analysis?
3) Is your investment target trading at a premium or discount? Why?
4) Would you invest in this company based on the closing stock price of the most recent quarter end?
5) Where do you see valuation headed based on funds flow/risk premiums and earnings?