Tuesday, October 31, 2017

Four, Twenty, and Two Hundred Forty-One

Griffin Capital Essential Asset REIT announced a new NAV on Friday, October 27, 2017, of $10.04 per share, which was down from $10.44 per share as of October 27, 2016.  The drop in NAV is just under 4% at 3.8%.  This drop in NAV did not come as a shock.   It is only an estimate since the REIT is not traded on an exchange.  The following bullet point from the investor letter accompanying the valuation notice did surprise me:
The decline in NAV from last year stems, in part, from our close working relationship with our tenants as 17 of them (out of 84 properties) provided us with long-term notice related to space use expectations, influenced mostly by corporate mergers and restructurings. These advanced notices will potentially allow us to capture early termination fees which will offset the costs to re-lease the spaces to new tenants under long-term leases while taking advantage of favorable market fundamentals. While we did not include these potential benefits in this current estimate of NAV, we are optimistic that such potential will be achieved and accounted for in future NAV calculations.
The way I read the above passage is that tenants in 17 of the REIT's 84 properties, or 20%, have given notice that they plan to vacate their space.  At least that is how I read the euphemistic statement "provided us with long-term notice related to space use expectations."  Since nearly all of Griffin Essential Asset REIT's properties are single-tenant net leased properties, the REIT is looking at 20% of its properties being vacant.  A reference to the benefits of capturing lease termination fees confirms my thoughts on tenants vacating the properties.  So much for the concept of Essential Assets.

The REIT must spend the lease termination fees to obtain new tenants through lease incentives and improvements.  Since the majority of the REIT's properties are single-tenant, getting new tenants to take an entire building is going to cost the REIT money. 

Griffin Capital Essential Asset REIT had $3.36 billion in total assets as of June 30, 2017.  Its valuation had a estimated advisor promote of a whopping $241,000.  This meager incentive compensation estimate and a big leasing challenge signal to me that this REIT is not going to be seeking liquidity any time soon.

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