In a move that highlights regulators' concerns with nontraded real estate investment trusts, Wells REIT II told investors last week that the new estimated value per share is $7.47.
Most of the nontraded REIT's shares had been issued at $10 apiece.
Wells Real Estate Funds is a giant of the nontraded-REIT industry. Its Wells REIT II had 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.
FINRA'S RULE PROPOSAL
The announcement of the Wells REIT II's new estimated share value comes as regulators have been 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 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].”
According to its SEC filings, the fund's real estate assets equaled $10.13 a share, but its debt was $2.65 a share, driving down the new estimated value per share. Although 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 an SEC filing.
Wells spokesman Mike Dobbs declined to comment beyond the information included in the filings.
The Wells REIT II portfolio has more than 90 buildings, including Fortune 500 company headquarters.
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 the 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 Nov. 10. “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.
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