We sometimes receive questions regarding the leverage ratios for non-traded REIT programs that FactRight uses in its analysis, given that they are not as favorable the same as the leverage ratio such programs have published in their SEC filings or other material. And to a certain degree, these questions are appropriate. The complicating factor is that not all leverage ratios are created equal. While “leverage ratio” sounds like it should be fairly straightforward on its face, if you dig a little bit into program disclosures and calculations, you find that it means different things to different issuers.
Real world differences
To illustrate, here are some examples from recent quarterly filings:
In its most recent 10-Q, CNL Healthcare Properties II, Inc. disclosed a debt leverage ratio calculated on the “aggregate carrying value of our assets.”
Cole Real Estate Income Strategy (Daily NAV), Inc. recently disclosed three leverage ratios:
- Net debt leverage ratio, which is the ratio of net debt to total gross real estate assets net of gross intangible lease liabilities
- Ratio of debt to the cost (before deducting depreciation or other non-cash reserves) of gross assets
- Ratio of debt to the fair market value of gross assets.
Phillips Edison Grocery Center REIT II, Inc. has a different take. In its recent 10-Q, it disclosed debt to total enterprise value, calculated as net debt (total debt, excluding below-market debt adjustments and deferred financing costs, less cash and cash equivalents) as a percentage of enterprise value (equity value, calculated as diluted shares outstanding multiplied by the estimated value per share, plus net debt).
Is your head spinning yet?
Related, critical definitions are not uniform
Furthermore, in prospectuses, non-traded REITs usually disclose a maximum and target leverage. But again, everyone has their own take.
NorthStar/RXR New York Metro Real Estate, Inc.’s prospectus states that for the purpose of calculating maximum leverage, the program would approximate “75% of the aggregate cost of our real estate investments and other assets, plus cash, before deducting loan loss reserves, other non-cash reserves and depreciation.”
According to Griffin American Healthcare REIT IV, Inc. prospectus, maximum leverage is “expected to approximate 75.0% of the aggregate cost of our real estate and real estate-related investments before depreciation, amortization, bad debt and other similar non-cash reserves.”
Non-traded REITs even have different takes on the definition of fair market value (FMV). Inland Residential Properties Trust, Inc. defines FMV as “equal to the greater of the contract purchase price paid for the asset or the value reported in a more recent appraisal of the asset.” For Griffin American Healthcare REIT IV, Inc., FMV equals “the purchase price paid for the asset or, if the asset was appraised subsequent to the date of purchase, then the fair market value will be equal to the value reported in the most recent independent appraisal.” For Bluerock Residential Growth REIT, Inc. the FMV is ‘determined by our Manager’. (Emphases throughout these citations are mine.)
Apples to apples or snowflakes to snowflakes?
I will add here that none of these metrics are necessarily or even fundamentally wrong, but how do you compare one investment program against the other? For our peer comparison analysis (which you can access on the FactRight Report Center), FactRight leverages its data provider S&P Global and keeps programs comparable by using total debt as a percentage of gross properties for all. Both are standard GAAP measures straight off the balance sheet, and do not take any contortions to arrive at. The limitation is that the ratio does not account for market movements. Thus, we also consider (and disclose in our reports) a leverage ratio as calculated by the REIT program, if it is disclosed in its public filings. But due diligence analysts must be aware that these leverage and fair value metrics are often contrived to present the portfolio in the best possible light and it’s likely that metrics from any two programs will not be exactly alike.