Another nontraded REIT faces sharp decline in value

Another large nontraded real estate investment trust has seen a sharp decline in its estimated value, with CNL Lifestyle Properties Inc. reporting this afternoon a new estimated per share value of $7.31, a drop of 27% from its offering price.
The REIT, which invests in an eclectic variety of properties including ski resorts, theme parks and senior housing, was originally priced at $10 per share.
The REIT is also cutting its “distribution,” or dividend to investors, according to a letter sent to investors this afternoon.
It had paid an annual distribution of 6.25% of the original share price.
That has been cut, and can be calculated two ways. The new distribution will be an annual payment of 5.81% of the new estimated value of $7.31 per share. When using the original $10 per share offering price, however, the annual yield of the dividend drops to 4.25%.
CNL Lifestyle Properties is a substantial REIT, having raised $2.7 billion in equity from investors. The offering stopped raising money last year.
“This first (net asset value) has been primarily impacted by a decline in value of our golf and lodging portfolios, and our discontinued mezzanine lending program,” said the REIT’s chairman, James Seneff, and CEO, Stephen Mauldin, in a letter on Tuesday to investors. “This has resulted in large part from the economic downturn which has been reflected in all parts of the American economy. In addition, our current valuation was also impacted by the level of distributions made to shareholders.”
The REIT’s investments in ski, attractions and senior housing have increased in value, the executives said.
“We believe that despite the new lower estimated per-share value at this time, the return on you investment remains quite attractive among income-producing investments,” the executives said.
Distributions are payments made to shareholders, similar to dividends.
The nontraded REIT industry has been plagued recently by a number of large REITs that launched at the top of the real estate market, acquired high priced assets, and then saw those assets sharply decline after the real estate bubble burst.
Other REITs that have seen sharp devaluations this year include: KBS Real Estate Investment Trust, which was originally sold at $10 per share and in March had a new estimated value of $5.16 per share, and the Dividend Capital Total Realty Trust, which last month was revalued to $6.69 per share and originally priced at $10 per share.
The diversity of the portfolio has benefited the REIT, Mr. Mauldin said.
“Take the ski portfolio,” he said. “It’s diversified, with half in the eastern part of the country and the other half in the west. Diversity among asset classes has been a hallmark of how the portfolio has been crafted. And senior housing diversifies the portfolio further.”
Positive trends to increase income in the portfolio, such as a rebound in the golf industry, may give the REIT potential to increase the dividend at some point in the future, said Joe Johnson, chief financial officer. However, the board has many considerations when making such a decision.
“CNL Lifestyle is the last of the older non-listed REITs with significant valuation/performance issues to post a valuation,” said Michael Stubben, president, MTS Research Advisors. “All of these REITs were adversely impacted by acquiring assets during a pricing bubble of 2006 to 2007 and making investments in more volatile commercial real estate sectors.”
“But they have had other significant challenges including impaired assets, failed alternative investments, and short-term debt maturities that have severely impacted valuations and sustainable dividends,” Stubben added. “The majority of these REITs will not get values back to $10 per share, but the ultimate results will depend on how strategically they manage their assets and the liquidation of the REITs over the next few years.”
CNL Lifestyle Properties Tuesday also reported a net loss of $19.9 million, or seven cents per share, for the quarter that ended in June, vs. a loss of $15.7 million, or five cents per share, for the same period last year.