Last week, Giancarlo Nicastro, CEO at SiiLA, the opportunity to sit down with Marco Ribeiro who operates Capright’s Brazil office in São Paulo.  Capright is a US-based valuation and advisory firm that provides asset valuations throughout Brazil for many North American investors as well as several local real estate funds including publicly traded Fundo de Investimento Imobiliários (FIIs).

Giancarlo Nicastro (GN):  As simply as you can explain it, what is the difference between the Net Asset Value (NAV) and the Market Capitalization of an FII? 

Marco Ribeiro (MR):  The NAV is the underlying market value of the net assets (total assets less total liabilities) in an FII, theoretically the proceeds you would receive within a reasonable period if you sold the assets.  Market Cap is simply the total number of outstanding shares in the FII multiplied by the current stock price.

GN: Since the underlying stock in an FII is ultimately backed by the net assets, are NAV and Market Cap usually within a close range of each other?

MR: Actually no.  NAV and Market Cap can fluctuate significantly and do not generally move in tandem.  It is not uncommon for one to be 20% or 30% higher or lower than the other.  There are several important reasons for this, the most important of which is that public markets trade continuously and, because they are more liquid, they are also more volatile.  Every day capital floods into and out of different stocks depending on market sentiment.  The other big reason for the disconnect is that Market Cap is dynamic and NAV is only measured periodically, maybe once or twice per year and may not capture updated leasing, performance or other characteristics of the assets.

GN: What are some specific aspects of the “market sentiment” you mentioned that influence the stock price?

MR: Wow, that’s a big question! If I knew the answer exactly I’d be rich.  It is impossible to pinpoint all the forces that impact the market and which ones will dominate.  As the famous economist John Maynard Keynes once said the decisions of market participants can be driven by “animal spirits” especially in times of stress or uncertainty.  I will attempt to answer your question though: I think interest rates, foreign exchange rates, and general economic conditions all have a big impact on the stock market.  And, of course another big factor for investors is yield; a high dividend yield is attractive to investors seeking steady income.   

GN:  Why is understanding NAV so important? 

MR: For FIIs, NAV is crucial to making informed investment decisions.  If you have an accurate measure of the NAV of a fund at a point in time you can understand whether the stock is trading at a discount or a premium to the intrinsic value of the net assets.  Over a long enough time horizon and depending on the “animal spirits,” the stock price will usually intersect with the NAV.  In this way, the NAV acts as a force that grounds the stock price over the long term.      

GN: How reliable is the NAV data that FIIs make public? 

MR: It varies a lot depending on the fund.  The best funds all have a robust and accurate valuation compliance process, but most have a less rigorous process leading to inaccurate NAV estimates.  In some cases, there are embedded conflicts of interest in the valuation policy or with the party valuing the assets.  It is best to select a fund that bases its NAV on asset values provided by independent and unbiased experts.     

GN: Thanks so much Marco for explaining this important topic.  It was so helpful! 

MR: My pleasure!