A number of non-traded REITs recently reported estimated share values in their annual reports on Form 10-K, and a perusal of the related disclosure leaves us wondering how the values were computed. Recall that in 2009 FINRA issued Notice 09-09, which addressed requirements relating to per-share customer account statement values. This notice reminded broker-dealers that they could not continue to include the $10 per share offering price in account statements beginning 18 months following completion of the issuer’s offering. In addition to being necessary for account statement purposes, these valuations are also useful for assessing a sponsor’s prior performance, as the published value could be one of the better indicators of how a NTR is faring until it actually trades or is liquidated. Unfortunately, the disclosure surrounding these valuations has been limited, and makes it difficult to understand what the values represent.
For example:
- Many indicate that they considered a variety of valuation techniques, but they don’t specifically indicate which one yielded the reported value.
- The techniques they use typically include discounted cash flow analysis and application of multiples based on a review of cap rates and the values of publicly traded REITs. Applying these techniques to a given portfolio can yield varying results depending on the assumptions used, including discount rates, terminal cap rates, and growth rates in projected NOI, and different techniques can yield different values. Despite this, none of the NTRs we reviewed disclosed any of the assumptions they utilized or the ranges of values indicated by the different valuation techniques.
- Many say they used an “investment bank” or a “consultant” to assist in the valuation, but none disclose the identity of the firm, the precise service it provided, or its recommendation as to value, nor did they disclose potential conflicts, such as those relating to other services the firm may have provided to the NTR and the fees it received for those services.
- Some consider the “value” of liabilities on the balance sheet, and presumably increase the overall net asset value based on some sort of positive value assigned to below-market debt. Since this is a value over and above the values assigned to the asset side of the balance sheet a reader might be interested in what it is, but none of the NTRs disclose how much the debt side of the balance sheet contributed to overall value.
- Some say that they reviewed “current, historical and projected” cap rates – does this mean they estimated value as of a current date based on cap rates that existed in the past or that they project will exist in the future?
While management may have the tools necessary to do so, additional disclosure might make it easier for an outsider to reconcile the stated value of a REIT with the substantial front-end load, historic distributions in excess of FFO, impairment charges, losses on other assets, and/or property purchases prior to the recent severe economic downturn.
