Public-Market NAV Unlocking
Buy discounted public real estate and remove the causes of its discount
- Difficulty
- Advanced
- Time to result
- ~months to results
- Steps
- 7
- Confidence
- 96%
The method starts by valuing a public real estate company as a collection of privately tradable assets, then comparing that value with its stock-market capitalization. A discount alone is insufficient: the investor must identify a correctable reason, such as an unwanted business segment, weak capital allocation, stale governance, or an absent succession plan. The investor then proposes concrete changes and works with directors, executives, and other shareholders to implement them. Progress is judged by whether the company moves toward net asset value. Operational repair is preferred, but a strategic sale becomes appropriate when management is unlikely to achieve the available private-market valuation independently.
Origin
Extracted from Masters in Business through John Litt's account of Land and Buildings' activist real estate investments, including its Liberty Property Trust campaign.
Core principles
- 01Compare public valuations with private-market asset values
- 02Treat a discount as an opportunity only when its cause is fixable
- 03Identify the specific obstacle preventing recognition of net asset value
- 04Work constructively with boards, management, and shareholders
- 05Prefer operational repair, but consider a sale when it is the only credible unlock
How to run it
- 1
Value the underlying real estate
Estimate what the company's properties would command in private transactions. Use current comparable sales and property-level fundamentals rather than relying solely on the stock price.
Pro tip Compare the portfolio with recent transactions involving similar property types.
Watch out An optimistic private-market estimate can create a false discount.
- 2
Measure the public-market discount
Compare estimated net asset value with the company's market valuation and with public peers. Prioritize substantial discrepancies rather than marginal mispricing.
Pro tip Check whether focused peers trade at premiums while the target trades at a discount.
Watch out A large discount may be justified by leverage, poor assets, or deteriorating demand.
- 3
Diagnose the cause
Determine why investors avoid the company. Possible causes include an unpopular segment, poor capital allocation, weak governance, or management credibility.
Pro tip Translate investor objections into a small set of potentially fixable issues.
Watch out Do not treat a fundamentally broken company as a straightforward valuation gap.
- 4
Design the unlock
Specify actions that directly address the cause, such as divesting a segment, refreshing the board, changing leadership, or improving capital allocation.
Pro tip Tie every proposed action to its expected effect on net asset value realization.
Watch out Generic demands for improvement do not create an executable path.
- 5
Engage stakeholders
Work with management, directors, and shareholders to build support. Begin constructively and escalate only when cooperation fails.
Pro tip Present valuation evidence and concrete alternatives rather than relying on public pressure alone.
Watch out An unnecessarily hostile campaign can destroy cooperation and delay the result.
- 6
Test strategic alternatives
If internal changes cannot realize the available value, approach credible strategic or financial buyers. Compare sale proceeds with the realistic standalone outcome.
Pro tip Use recent transactions to identify buyers already paying premium private-market prices.
Watch out Do not force a sale when the repaired company can create more long-term value.
- 7
Verify value realization
Track asset sales, governance changes, bids, and the stock's movement toward net asset value. Reassess the campaign when evidence contradicts the original valuation.
Pro tip Define success in value-per-share terms before beginning the engagement.
Watch out A rising share price does not prove that the full valuation gap has closed.
In the wild
Liberty Property Trust owned desirable warehouses but traded below their estimated value because it also held offices and had made poor capital-allocation decisions. Land and Buildings encouraged the company to exit offices, develop a succession plan, and refresh its board. After a major Blackstone warehouse transaction established a high comparable valuation, Litt urged Liberty to contact large buyers. Prologis ultimately acquired it for $61 per share, close to Litt's estimated $62 value.
→ The strategic sale realized a valuation management was considered unlikely to achieve independently.
Steve Roth acquired the Alexander's department-store chain for its underlying properties rather than its retail operation. He closed the stores and redeveloped the real estate, including the full city block that later became the Bloomberg Building with retail, offices, and condominiums.
→ Undervalued public real estate was transformed into billions of dollars of created net worth.
Common mistakes
Buying every apparent discount
Some stocks are cheap because their assets or businesses are fundamentally impaired. Require a credible, fixable cause before investing.
Demanding change without a valuation bridge
An activist proposal should show how each action moves the company from its current price toward net asset value.
Rejecting a sale on principle
Repair is preferable, but a sale may be the only realistic route to a valuation that management cannot attain alone.
Is it for you?
Best for
It is best for investors who can value underlying property assets and influence public-company strategy or governance.
Not ideal for
It is not ideal when asset values are uncertain, the business is fundamentally broken, or the investor cannot sustain a long engagement.
From the transcript
“we like buying cheap real estate in the public markets”
“where there's something that's broken, that can be fixed and you can unlock the value and get back to net asset value”
“you can work with the boards, you can work with the management team, you can work with the other shareholders to unlock that value.”
From the episode
Jonathan Litt on Real Estate Investments (Podcast)
Jonathan Litt