Saturday, March 02, 2013

Fantasyland Meets The Real World

A strange dichotomy occurred yesterday in the non-traded REIT world.    Behringer Harvard Multifamily REIT I announced in its 10-K a value of $10.03 per share.  It derived part of its value by capitalizing 2013's estimated net operating income at cap rates based on a property's region.  The cap rates used ranged from 4.3% to 5.2%, with an aggregate cape rate of 4.7%.  It's a forward cap rate based on 2013's expected net operating income, with aggregate revenue growth projections of 5.4% 

It took a few seconds to put my eyes back in my head after reading these assumptions.  I won't quibble with the low cap rate estimate because the esteemed Duff & Phelps - assumption confirmer extraordinaire - reviewed the REIT's valuation methodology.  If cap rates are really this low, this REIT should liquidate its portfolio as soon as possible.

Back in the real world, American Realty Capital Trust III (ARCT III) and American Realty Capital Properties completed their merger and the combined company's stock began trading yesterday morning under the symbol ARCP.   ARCT III investors now have fully liquid shares of ARCP.  ARCP stock closed at $13.11, which gives ARCT III investors a fully liquid value of $12.45.  This is a simple return of 24.5%, exclusive of any distributions. 

A non-traded REIT's advisor can derive any value it wants, but because a non-traded REIT is just that - non-traded - its value is a guess created from an alchemy of advisor self-interest.  To me, until a non-traded REIT is priced by the market, its value estimate is not worth the price paid for it.

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