The headlines announcing valuation and liquidity-related changes to non-traded investment programs started in mid-March and have been pretty much a daily occurrence since. While responses to the COVID-19 outbreak has varied depending on asset class, many publicly reporting non-traded REITs and BDCs have temporarily suspended distribution reinvestment plans, share repurchase programs, and in some cases reduced or suspended distributions. Some hospitality REITs have suspended their offerings due to the difficulty in establishing a fair net asset value during such market volatility. This seems the right thing to do. Buckle down, conserve cash and don’t offer shares to investors at unsubstantiated prices.
The limits to lower volatility
Nonpublic REITs and BDCs gained favor with investors in part because of the lower volatility of their share prices relative to public programs. Now, the question is whether their currently reported values reflect reality or are ignoring current market conditions and being smoothed over due to valuation frequency.
The valuation of assets during times of extreme market volatility can become a complicated issue. In a March 31 SEC filing, CIM Income NAV Inc. announced its plans to modify its public offering from a daily to a monthly net asset value REIT. Management cited the “current competitive landscape” and that the move would allow for “greater access to capital” amongst its reasons. Perhaps. Griffin Capital Essential Asset REIT Inc. stopped publishing daily valuations in March stating it would “likely” begin publishing quarterly valuations in late June. Both InvenTrust Properties Corp. and Hines Global REIT Inc. have announced they will not be determining a new annual net asset value during this this time of uncertainty.
When following the process yields an irrelevant result
In a most interesting April 3rd headline from The DI Wire; Moody National REIT II Increases NAV Per Share, then just below that headline in the story itself:
Moody National REIT II recently suspended its public offering and investor distribution payments, as well as the distribution reinvestment plan and share repurchase program effective on April 6, 2020.
Incongruent, yes, but above board as the NAV was determined as of December 31, 2019. Per the SEC filing, management followed Practice Guideline 2013-01, Valuations of Publicly Registered Non-Listed REITs, issued by the Institute for Portfolio Alternatives (IPA) in April 2013, which is industry standard. The IPA guidelines recommend that valuations be produced at least annually and disclosed as soon as possible after year end. As a disclaimer, Moody management noted in its filing:
As a result [of the ongoing global pandemic of COVID-19], the estimated NAV per share as of December 31, 2019 should not be considered as an accurate or approximate value of a share of the common stock at this time.
Wonderful, but unless management changes its valuation policy, that might be the value that will appear on investor account statements for the next year.
Not all valuations policies are the same, or will stay the same
Valuation policies vary among programs and are laid out in the prospectus. Certain larger non-traded REIT price their shares monthly with an assist from third-party sources. A $1 billion-plus REIT can better absorb the costs associated with frequent independent valuations than smaller programs. However, as shown by CIM Income NAV, the policies are not set in stone. In its March 25th SEC filing, CIM Real Estate Finance Trust, Inc. disclosed that:
…although it intends to publish an updated estimated per share NAV on an annual basis, it may be required to reevaluate the estimated NAV per share sooner if the COVID-19 outbreak has a material adverse impact on the company. The impact of the COVID-19 outbreak on the value of the company’s assets may be significant and will largely depend on future developments, which are highly uncertain and cannot be predicted.
Valuation of illiquid assets for alternative investment programs is a complex task under the best of circumstances. Sponsors have to balance the costs, resources and regulatory requirements at the program level against its responsibility to not misprice its offering, investor needs to be informed and overall fund returns in a competitive environment. But the times they are a changing and this recent event will most likely cause some sponsors and fund boards to rethink their program’s current valuation policies in terms of frequency. Bloomberg reported last week that LPL Financial Holdings cut off client purchases of eight nonpublic REITs, including the Blackstone Real Estate Investment Trust, because of concern that its NAV might lag changes in the value of its investments. It is still early, but we will be monitoring this in the next few months. From a due diligence perspective, broker dealers and RIAs should press sponsors on their valuation policies to ensure they are adequate in this new environment. How sponsors respond to these challenges will be telling in and of itself.
This article is not intended to address the appropriateness of individual REIT responses to current market conditions, which may vary based upon REIT structures, investment strategies, and/or asset class.