Wells II securities issued at $10 apiece, now worth an estimated $7.47; pricing of nontraded real estate trusts under the microscope
In a move that highlights regulators' concerns with nontraded real estate investment trusts, Wells REIT II is telling investors this week that the new estimated value per share is $7.47.
Most of the shares of the nontraded REIT had been issued at $10 a share.
Wells Real Estate Funds is one of the giants of the nontraded REIT industry. Its Wells REIT II raised $5.9 billion from public offerings as of June 30, according to filings with the Securities and Exchange Commission.
After commissions, fees and other expenses such as share redemptions, the REIT has invested $4.7 billion of the proceeds in real estate, according to SEC filings.
The announcement of the Wells REIT II's new estimated share value comes after regulators have been increasingly drawing attention to how nontraded REIT sponsors show a value for the product. For example, the Financial Industry Regulatory Authority Inc. issued a rule proposal in September that would drastically change the way the value of nontraded REITs appears on client account statements, a nettlesome issue for independent broker-dealers that sell the products and the sponsors that create them.
Finra's 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].”
According to its filings with the SEC, the fund's real estate assets equaled $10.13 per share, but its debt was $2.65 per share, driving down the new estimated value per share. While commercial real estate values have broadly slumped, the Wells REIT II fund said that the overall decline in assets value was about 8.1%, according to a filing with the SEC.
Mike Dobbs, a Wells spokesman, declined to comment beyond what information was included in the filings.
There are more than 90 buildings in the Wells REIT II portfolio, including Fortune 500 companies.
In line with industry standards, the Wells REIT had previously said that it would announce a new estimated value for the fund by the end of this year. Business broker Altus Group Inc. performed the evaluation, and clients will see the reduction in the estimated account value on statements next month.
The REIT's board “chose to base the new estimated value per share for Wells REIT II solely on the estimated net asset value — meaning the real estate, debt and other assets and liabilities on the REIT II balance sheet — without modification,” the REIT wrote in a letter to shareholders, which is dated Nov. 10 but was filed with the SEC today. “That's it. Period.”
The board expects to update the estimated value per share annually, it said in the letter, which was signed by the REIT's chairman, Leo Wells, and its president, E. Nelson Mills.
