Looking Critical

Carter Validus Mission Critical REIT announced a new net asset value late on Friday, the last day of a holiday week, right before another holiday weekend.  Mission Critical's timing makes sense when you unpack the filing.  On the surface it's bad:  the REIT's net asset value dropped 7.6% from $10.02 per share to $9.26 per share, based on September 30, 2016, and September 30, 2017, valuation dates.  The news does not get better.  The REIT's real estate valuations, which were down 4.6% year-over-year, included the sales price valuation of the REIT's fifteen data centers.  The sale of the fifteen data centers closed at the end of December 2017 and represented a gain over their book value of $239 million.

I am not optimistic about the REIT's remaining properties if the REIT's total valuation is down 4.6%, but includes the valuation of the fifteen properties sold at 29% gain to book value.  The fifteen property sale is no trifle, they sold for $1.065 billion and netted $768.5 million to the REIT, which is 45% of the equity the REIT raised from investors.

The REIT's letter to investors describing the lower valuation, blamed the decrease, in part, on three healthcare properties and confusingly "certain lost rental income and reserves and write-offs recorded on tenant related notes receivable from certain healthcare care assets."  The three properties, Walnut Hill Medical Center, Cumberland Surgical Hospital and Miami International Medical Center had a combined purchase price of $160,551,000.

The Friday filing also included this passage related to the recent property sales: "We will evaluate and determine how to best deploy the proceeds from our dispositions, including potentially paying a special distribution to stockholders."  The italicized bold is my emphasis.  I have seen other sponsors make large sales and not distribute the proceeds to investors to avoid acknowledging that the income from the remaining assets is insufficient to cover current distribution rates and are likely of lower quality than those that were sold.  Given Carter Validus Mission Critical's chronic over payment of its distribution, apparent trouble in its remaining healthcare assets, and its inability to have a liquidity event in 2015, I am afraid the REIT will reinvest the $768 million rather than return the capital to investors.  Carter Validus is still raising money in Carter Validus Mission Critical REIT II, and while the thought of recycling a portion of a $768 million capital distribution into REIT II may be tempting, I suspect Carter Validus's fear of stopping REIT II's capital inflow will take precedence if it reckons with REIT I's remaining portfolio.  I think there is a good Carter Validus decides to reinvest the $768 million.

Carter Validus REIT I:  Do the right thing and return the $768 million.