Implied cap rate
Sector Deep DivesThe yield the share price implies on the portfolio, found by adding net debt back to market capitalisation and dividing net operating income by the result.
Also written: market implied cap rate, implied yield
An implied cap rate translates an equity price into an asset yield, which is the only way to compare what the stock market thinks a portfolio is worth with what the transaction market is paying. Take the market capitalisation, add net debt, and divide net operating income by that total.
It is the single most useful move in listed real estate, because a discount to NAV is quoted on the equity while property is priced on the assets, and the two are separated by leverage. The discount always looks larger than the underlying view on property, and how much larger depends entirely on how much debt sits in between.
That is why a discount to NAV is not comparable across companies with different balance sheets. The more leverage a company carries, the smaller the yield move that a given headline discount implies, so a screen ranked on discount is partly a screen on gearing.
Once you have the implied yield, the question becomes answerable with evidence. Compare it to recent transactions in the same asset class and market. If deals clear nearer the implied yield, the share price is marking the valuers to the market rather than mispricing the company.
Worked example
€50m of net operating income, a portfolio valued at 5.0% so €1,000m, and €400m of net debt gives NAV of €600m.
The shares trade at a 30% discount, so equity is €420m. Add the debt back: €820m. €50m over €820m is a 6.1% implied cap rate, about 110 basis points of widening.
Repeat with €600m of net debt. NAV is €400m, the same discount values equity at €280m, and the implied portfolio value is €880m, a 5.7% cap rate. Identical discount, roughly 68 basis points implied.