Here is a must-read InvestmentNews article on the issues surrounding non-traded real estate investment trust (REIT) valuations. This blog has been railing for months on this issue and it's about time the conversation expanded. The article discusses four non-traded REITs - Industrial Income Trust, Strategic Storage Trust, Steadfast Income REIT and TNP Strategic Retail Trust - and their valuation methodologies. The methodologies vary among the REITs, but are all dependent upon input from the REITs' advisors and require the REITs' boards' approvals.
The issues addressed in the article are important and are not going away. The market will see more re-valuations in the coming months as big named REITs like Griffin-American Healthcare REIT II and Hines Global REIT prepare secondary offerings.
There a few issues that deserve a follow-up article by author, Bruce Kelly. The article only briefly touches on the short-term sales impact of the revaluations. Industrial Income Trust and Strategic Storage saw huge sales increases between the time the new value and share price was announced and the time the new price went effective. After the reprice, equity sales for both REITs are lower than before the revaluation was announced (although the post-revaluation time period has been limited). The whole revaluation process smells like a marketing exercise to get a large sales surge.
I still don't understand how a non-traded REIT can revalue its shares and then sell shares with a load at the new revalued price. What happens to the REIT's offering costs? The offer price should be the new value per share, plus offering costs. A REIT's load is real and must be added to its net asset value per share. This is how business development companies (BDCs) operate. BDCs are required to determine a quarterly net asset value per share, and then add the sales load costs to arrive at an offer price. In this respect, non-traded REITs are no different. The credibility surrounding non-traded REIT valuations is suspect to begin with, and the valuations become specious when the load is ignored.