Unlocking Hidden Value: NAV Discounts Offer Rare Opportunities in REITs and CEFs

The market for real estate investment trusts (REITs) and closed-end funds (CEFs) is currently riddled with valuation discrepancies so stark they defy traditional market logic. As of May 2025, sectors like office real estate and energy infrastructure trade at discounts to net asset value (NAV) that exceed historical averages by double digits, while healthcare and data center REITs command premiums. This divide presents a unique moment for investors to deploy capital into mispriced assets poised for reversion to intrinsic value.

Why NAV Discounts Matter Now

NAV discounts measure the gap between a fund’s share price and the value of its underlying assets. For REITs and CEFs, these discounts often widen during periods of market stress or sector-specific pessimism. Today, however, the discounts are not merely cyclical—they reflect temporary overreactions to structural concerns, such as remote work trends, energy transition uncertainty, and lingering post-pandemic demand shifts. History shows that such gaps eventually narrow, rewarding investors who act before the market corrects its myopia.

Sectors Trading at Historic Discounts: Where the Mispricing Lies

1. Office REITs: The Most Undervalued Play

The office sector is trading at a median 44.1% discount to NAV, with outliers like Hudson Pacific Properties (68.2% discount) and Industrial Logistics Properties Trust (70.0% discount) highlighting extreme pessimism. These discounts vastly exceed the sector’s 10-year average of 25%. Yet, the fundamentals are improving: occupancy rates have stabilized, and companies are increasingly adopting hybrid work models that still require physical offices. The discount reflects an outdated narrative of obsolescence, not reality.

2. Energy Infrastructure: Discounted for Transition, Not Failure

CEFs like the ClearBridge Energy Midstream Opportunity Fund (EMO) trade at an 11.7% discount to NAV, despite owning pipeline giants like Energy Transfer and Enterprise Products Partners. Investors are pricing in a full-scale collapse of fossil fuel demand, but the reality is more nuanced. These funds hold assets critical to energy transition—pipelines for renewables, LNG exports, and carbon capture projects. The discount is a gift for those willing to look beyond short-term volatility.

3. Hotels: A Sector Overdue for a Turnaround

Hotel REITs like RLJ Lodging Trust (41.6% discount) and Pebblebrook Hotel Trust (38.1% discount) are trading at discounts not seen since 2009. Yet, leisure travel has rebounded strongly, and corporate demand is slowly returning. The discount is a relic of pandemic-era fear, not a reflection of today’s demand.

Closed-End Funds: Leverage and Liquidity Catalysts

CEFs offer a dual advantage: their term dates and leverage structures act as catalysts for discount narrowing. For example:
- Tortoise Sustainable and Social Impact Term Fund (TEAF) trades at a 15.9% discount to NAV, but its 2031 liquidation date guarantees investors will receive the fund’s NAV at maturity. This creates a built-in timeline for the discount to close.
- BlackRock Municipal 2030 Target Term Trust (BTT) offers an 11% discount to NAV, with a 2030 liquidation target. Its tax-free yield of 2.7% becomes even more attractive as rates stabilize.

The Case for Mean Reversion: Why Discounts Will Narrow

1. Interest Rate Stability: The Federal Reserve’s pause on rate hikes reduces refinancing risks for leveraged REITs and CEFs, easing pressure on their share prices.
2. Sector-Specific Catalysts:
3. Office REITs will benefit from rising rents in urban cores as hybrid work normalizes.
4. Energy infrastructure funds will gain from bipartisan support for critical energy projects.
5. Term Fund Mechanics: Funds like TEAF and BTT are mathematically forced to close their discounts by their liquidation dates.

How to Invest: A Strategic Roadmap

1. Target the Most Undervalued Sectors:
2. Office REITs: Buy shares in Hudson Pacific Properties or Brandywine Realty Trust.
3. Energy Infrastructure CEFs: Add EMO to your portfolio for exposure to pipelines and terminals.
4. Leverage Term Funds:
5. TEAF and BTT offer both income and the certainty of NAV convergence.
6. Avoid Overrotation into Overvalued Sectors: Healthcare and data center REITs already reflect optimism in their prices. Focus on the discounted majority.

Risks and Considerations

• Leverage Exposure: CEFs like BTT (34.4% leverage) amplify gains but increase volatility.
• Sector-Specific Risks: Office and hotel REITs still face long-term demand uncertainties. Diversify holdings.

Conclusion: Act Before the Gap Closes

The current NAV discounts in REITs and CEFs are not a sign of permanent decline—they are a temporary dislocation created by market overreactions. The office sector, energy infrastructure, and term-dated CEFs offer asymmetric upside: the potential for 30-50% gains if discounts revert to historical averages. This is a rare moment to buy assets at a discount to their tangible value.

The clock is ticking. The longer you wait, the smaller the opportunity becomes.