Areas of Interest

I recently signed up for a nifty data collection service that notifies me any time select public companies make an SEC filing.  I set up the system up to receive notification on about a dozen non-traded REITs, and plan to include most all non-traded REITs in the near future.  Yesterday, Monday, I received a huge data dump from about half the non-traded REITs on my watch list.  The filings were all correspondence between the SEC and the non-traded REITs, with the SEC asking questions and wanting clarifications on these non-traded REIT's filings, in particular 10-Ks. 

All notifications included the initial SEC inquiry, the non-traded REITs' follow-up, any future questions and follow-ups, and the final letter from the SEC saying it had no further questions.   There was a general theme and consistency across the SEC's question and answer with the non-traded REITs.  First, the SEC wanted to know how the non-traded REITs determined their average lease rates and if this average included discounts and rent concessions.  The answer across all REITs was "no," the average lease rates excluded concessions.

Second, the SEC wanted to know how the REITs determined cap rates that the REITs included in their  filings.  To me, this seemed more disclosure related than questioning the actual cap rates, as the SEC didn't seem to have an issue with "average" cap rate (which I discussed here), it just seemed to want to know the formula used for calculating the disclosed cap rates.  The cap rates are all pro forma based on the non-traded REIT's estimate for first year net operating income (which is then divided by the purchase price to determine cap rate), or in the case of the averagers, the average pro forma NOI over the anticipated hold period divided by the purchase price. 

Finally, the SEC had questions on Modified Funds from Operations.  I get the sense that the SEC holds MFFO in about as much esteem as I do.  To paraphrase my take on what the SEC was inquiring about regarding MFFO, and again this was a theme across multiple non-traded REITS, was it was trying to determine why the non-traded REITs exclude acquisition costs from MFFO because REITs are in the business of buying and selling real estate, which obviously involves costs.  The response was that non-traded REITs exclude acquisition costs to make prior period comparisons more meaningful.  I am not going to argue this point, but will continue to discount MFFO until a REIT has fully invested its equity and MFFO really only consists of adjustments for straight line leases.