Value of popular nontraded REIT hammered

An opportunistic nontraded real estate investment trust has taken a severe hit to its estimated valuation.
Investors in the Behringer Harvard Opportunity REIT I learned at the end of the year that the trust’s estimated value was $4.12 per share, down from $7.66 a year earlier. That’s a drop of 46%.
Robert Aisner, president and chief executive of the REIT’s manager, Behringer Harvard, said in an interview Thursday morning that since the REIT is shedding assets, its valuation will go down in the long run. The value of the REIT has been declining steadily since 2009, when it was valued at $10 per share, to $8.03 per share before its most recent valuation.
The $4.12 valuation “is not surprising,” said Michael Stubben, president of MTS Research Advisors, which tracks nontraded REITs and other illiquid investments. “It’s a smaller REIT, and in its liquidation phase. It’s been underperforming and struggling throughout its program.”
But Mr. Aisner said the falling valuation of the Behringer Harvard REIT is due to the “deep decline” of six real estate properties in the portfolio. Two-thirds of the real estate holdings maintained the same value at the end of 2011 when compared with a year earlier.
At the end of September, the trust had total assets of $580 million, according to its most recent quarterly report. At the end of September, it reported a net loss for the previous nine months of $83 million.
Assets in the REIT have been declining, as well. At the end of December 2010, it had $697.6 million in total assets.
In explaining the decline in value in a letter dated Dec. 30, Behringer Harvard told shareholders that the property industry had taken a beating during the global economic downturn of the past few years.
“Many in the real estate industry did not anticipate the onset, extent or depth of the economic and real estate recessions,” the letter said. “Due to the economic stress of recent years, our original underwriting assumptions for the portfolio were not achieved, as key variables, such as leasing activity, growth in rental rates, occupancy rates, land sales and development project returns, failed to meet their forecasts.”
The REIT also said it will cut its advisory fees for its adviser, Behringer Harvard Opportunity Advisors LLC, by about $1 million per year.
Behringer Harvard is one of the major players in the nonlisted-REIT industry. It’s Behringer Harvard REIT I was ranked the fourth-largest in terms of invested assets, with close to $4.2 billion in real estate assets, according to the most recent InvestmentNews ranking of nontraded REITs. The value per share on that REIT has also fallen from its original $10 offering price, with its valuation in December reaching $4.64 per share.

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“The fact that Behringer Harvard REIT I and Behringer Harvard Opportunity REIT I have a 2011 estimated share valuation in a similar $4 range is purely coincidental,” the company said in a statement.
“In our view, our 2011 estimated share valuation for Behringer Harvard REIT I is not indicative of the eventual value we expect to harvest under normalized economic conditions,” the company statement said. “Moreover, Behringer Harvard REIT I pursued a core investment strategy quite different from opportunity-style investment programs such as Behringer Harvard Opportunity REIT I, Inc. and others.”
Most nontraded REITs are sold by brokers to investors at $10 per share. The goal for most nontraded-REIT managers is to return that principal to investors, either through a sale of the portfolio’s assets or an initial public offering. Typically, investors gain returns in the range of 6% to 7% while they hold the REIT.
Meeting that goal won’t be easy for the Behringer Harvard Opportunity REIT, Mr. Aisner said. “The recovery of $10 [per share] will be a real challenge,” he said.
The announcement by Behringer Harvard comes amid increasing scrutiny of nontraded REITs — and in particular, the valuation of the products.
The Financial Industry Regulatory Authority Inc. issued a proposal in September that would drastically alter the way the value of nontraded REITs appeared on client account statements, a nettlesome issue for independent broker-dealers that sell the products and the sponsors that create them.
The proposal takes aim at brokers’ commissions and other upfront costs. It would require that “all per-share estimated values, including those that are based on the offering price, reflect a deduction of all organization and offering expenses [net value].”
In November, managers at Wells REIT II told investors its estimated value per share was $7.47, down from $10.
While he wouldn’t peg a potential future value on the Opportunity REIT, Mr. Aisner said he is optimistic the properties that were at the heart of the REIT’s decline will improve.
One is a “99% leased portfolio in Central Europe,” he said. “Imagine the difficulty today of valuing assets in the eurozone, if you had to sell them today.”
“Another is a hotel in St. Louis,” he said. “We have a new three-year loan on that asset. The goal in 24 to 36 months is selling that asset, and the value, we believe, will be greater when we decide to sell it.”