(Answered) Question how does financial leverage affect reit share

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Question: How does financial leverage affect REIT share price premium (or discount) to NAV? Consider two REITs with identical assets.

REIT #1 employs debt financing that is 50% of the private value of its real estate assets, and its shares currently trade at a 12% premium to estimated NAV.

REIT #2 is all equity financed, and hence NAV equals gross asset value (or GAV). What is the share price premium to NAV for REIT #2? What if REIT #1 shares currently trade at a 10% discount to NAV. Use your findings to generalize the relationship between the share price premium to NAV and share price premium to gross asset value (GAV).

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