Poor REIT sales signal potential cuts in valuations

John Cox of Cox Capital Partners and Phil Bak of Armada ETF Advisors

'The problem is, when an NAV gets shaved, advisors and investors get pissed off,' one executive says.

The anemic start to the year for sales of nontraded real estate investment trusts is yet another indication of the tough market for commercial real estate investors, which is leading some market participants to expect a reduction in the value of some REITs, particularly the popular net asset value or NAV products.

Unlike listed REITs, nontraded REITs don’t trade, so the market doesn’t set their value. Instead, nontraded REITs rely on internal appraisals to determine the value of their real estate assets, a key component to understanding what a specific REIT might be worth.

According to Robert A. Stanger & Co. Inc., in the first two months of the year, sales of nontraded REITs by financial advisors totaled just about $900 million, for an annualized rate of $5.4 billion. That compares with $10.2 billion in sales in 2023 and $33.3 billion the previous year, according to Stanger.

With listed REITs seeing declines in value of 30% or more, some market observers have been wondering when NAV REITs will lower their values. From the start of January 2022 to October 27, 2023, the S&P United States REIT Index declined 35%, while many nontraded REITs’ valuations saw no such slump.

Rising interest rates since the start of 2023 have hurt REITs because the cost of capital rises. COVID-19 also has had a long-term impact on commercial real estate as more employees are working from home, driving down the occupancy of office buildings in cities.

NAV REIT bellwether Blackstone Real Estate Income Trust Inc. reported a net asset value of $14.53 per share in January 2022, and that had increased eight cents per share by last October, the same period over which the S&P U.S. REIT Index declined 35%. Known as BREIT, the Blackstone REIT’s valuation was $14.15 per share in February, according to the company,

BREIT paid out more than $2.8 billion in distributions during 2023, exceeding its cash flows of $2.7 billion, according to its annual report.

“The NAVs on those REITs have to be adjusted down,” said one senior industry executive who spoke privately to InvestmentNews. “I can’t imagine how those companies are avoiding it, and the NAVs could be down as much as 30%.”

“Occupancy is down and the cost of lending is up,” the executive said. “The problem is, when an NAV gets shaved, advisors and investors get pissed off.”

“Investors are looking to sell nontraded REIT positions before any future NAV resets,” said John Cox, CEO of Cox Capital Partners, which invests in non-traded alternatives in the secondary market via a proprietary fund.

“They know that the downward valuations are coming,” Cox said. “I think we’ll see that happen this year. These REITs can’t kick the can down the road any longer. Products vary, but just based on where the traded REIT market has gone, 30% could be shaved off current NAVs.”

Meanwhile, financial advisors and their clients should consider selling their positions in NAV REITs at their current values before any pending cut in value. NAV REITs have limited liquidity programs for investors who want to sell their shares back to the company.

“If NAV REITs have not yet changed values to what people are seeing in the market, if an investor can get out, use the opportunity to do so,” said Phil Bak, CEO of Armada ETF Advisors.