Thursday, July 19, 2012

Fees Matter

I posted last Friday that Steadfast Income REIT's advisor recently valued the REIT at $10.24 per share, and will begin offering shares at this new price in September.  I've written extensively about the valuation methods non-traded REIT advisors use to derive values, and am not going to re-argue my concerns in this post.  But I can't reconcile one area of these revaluations and share repricing:  why are the REITs' offering costs ignored?

Strategic Storage re-valued its shares earlier this year and has a net asset value of $10.79 per share, which is the same price at which it is offering its shares to investors.  Steadfast Income REIT announced on July 13, that its shares have a net asset value of $10.24 per share, and will offer shares to investors at this price in September.  The price for both these REITs don't reflect the REITs' offering costs.  I figure Strategic Storage has offering costs of 11.75% and Steadfast Income REIT has offering costs of 11.25%.  These are costs that are paid by investors to buy the REITs' shares, and are in additional to the REITs' net asset values.  These are hard costs that are paid regardless of the REITs' net asset value.  I don't understand why they are not worked into the new offer prices for these REITs.  It's as if these fees somehow magically don't matter anymore and have been whisked away with the new re-valuations.  The REITs' offering fees matter and the REITs' offer prices need to reflect these fees. 

To account for these fees, I figure Strategic Storage's share price should be $12.23 per share to reflect the 11.75% in offering costs investors have to pay, and Steadfast Income REIT's price should be $11.54 per share to reflect its 11.25% in offering costs.  Unfortunately, non-traded REIT's can't re-value away their offering costs. 


Clarity Finance said...

Of course, the "true" NAVs could be $9.52 for Strategic Storage and $9.09 for Steadfast. These are the NAVs that would allow shares to be sold at the new offering prices without diluting current shareholders. Is there a disclosure about that risk in the offering documents?

Rational Realist said...

I thought so too, but reading the valuation disclosure, the REITs' asset value is their offer price. I have not checked the risk disclosure.

Anonymous said...

Rational - I agree and have seen another example with the valuation of Industrial Income Trust. Wouldn't this simply be dilutive to existing investors?

Rational Realist said...

Anonymous, thanks for the comment. Yes, Industrial Income Trust is another example from earlier this year. I believe the strategy of not adding fees is dilutive to current shareholders.