Chartered Financial Analyst Level 2

Explanation

Correct Answer: B - whether the REIT is fairly valued.

Key Differences Between NAV and Book Value:

Net Asset Value (NAV) per share:

• Reflects the current market value of the REIT's real estate assets
• Uses fair market value estimates for properties
• Accounts for current market conditions and property appreciation/depreciation
• Provides a more realistic measure of what the properties are actually worth today

Book Value per share:

• Based on historical cost accounting
• Uses original purchase prices minus accumulated depreciation
• Does not reflect current market values
• Can significantly understate or overstate the true value of properties

Why NAV is Superior for Fair Valuation:

1. Market-Based Valuation: NAV incorporates current market conditions and property valuations, making it more relevant for determining if a REIT is trading at a discount or premium to its intrinsic value.

2. Investment Decision Tool: Investors use NAV per share to assess whether a REIT is undervalued (trading below NAV) or overvalued (trading above NAV).

3. Current Economic Reality: Unlike book value, NAV reflects the current economic environment and property market conditions.

4. Industry Standard: NAV is the preferred valuation metric in the REIT industry for assessing fair value.

While NAV does provide information about net worth (Option A) and property investments (Option C), its primary advantage over book value is specifically in determining fair market valuation for investment analysis purposes.