Tuesday, September 05, 2017

Hines Global II Goes NAV

Hines Global REIT II, which had raised $368,000,000 through July over its almost three-year offer period, is converting to a NAV REIT.   In filings last month, the REIT announced that it will commence a $2,000,000,000 secondary offering, publish a net asset value monthly, and have a perpetual life.  The REIT declared an NAV of $9.65 per share in February 2017.  Hines Global REIT II is eliminating acquisition and disposition fees, which is postive.  "Perpetual life" means that the REIT no longer has an expected term or a plan to provide liquidity through a listing, merger, or asset sale.  Investors that want to liquidate their shares must submit their request through the REIT's share redemption program (SRP).   The REIT's SRP has been expanded to allow for monthly redemptions of 2% of NAV, subject to a redemption cap of 5% of NAV per quarter.  The REIT can suspend, modify, or terminate its SRP at anytime.

NAV REITs are not a bad idea.  They allow their managers to take a long investment view instead of buying investments that fit into a targeted exit period, and a perpetual offering provides for capital inflows and investments over various investment cycles, lessening the seasonality of investing in a particular market, which occurs when money is raised and invested within a specific market cycle. There is no preclusion from Hines Global II having a future liquidity event, but it is no longer management's primary exit strategy.  In steady markets, redemption requests should be processed without an issue.  But NAV REITs will face a test when markets are unsettled, or even if there are specific REIT-level events and redemption requests exceed the monthly limits.  Based on the 2% monthly and 5% quarterly caps, significant requests for liquidity could hinder a REIT for years.

My complaint with Hines Global II's decision is not that it is restructuring as a NAV REIT, but that when investors purchased their shares in the REIT they were not expecting a perpetual life REIT, but an investment that would provide some form of liquidity in eight to ten years from when the REIT's offering started in 2014.  The REIT's investment objective and business plan are being changed because of Hines's failure to raise capital.  If the REIT had raised $1,368,000,000 instead of $368,000,000, there is no way it would be converting to a NAV REIT.

I understand market conditions change, but real estate markets have not changed that much since Hines Global II began raising capital in August 2014.  Interest rates and cap rates are still low, the U.S. economy is still growing, and Europe's economy has improved.  Outside of older, Class B or lower regional malls, most real estate assets classes are as strong as they were in 2014.   What has changed is non-traded REITs' ability to raise capital.  Until that is figured out, every REIT needs to add disclosure about the possibility of becoming a NAV REIT.

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