Why investors can’t trust some REITs’ net asset values

Non-traded funds have great leeway to define NAV

Why Investors Can’t Trust Non-Public REITs’ Net Asset Values

From left: Starwood Capital Group chair Barry Sternlicht and Blackstone president Jon Gray (Getty, Starwood Capital Group, Blackstone)

What is net asset value? For non-traded real estate investment trusts, it varies from one to the next — meaning investors cannot necessarily trust them. That may explain why those funds’ NAVs have been relatively stable while stock prices of many publicly traded REITs have plunged.

Real estate funds have a much looser way than other investments of defining the term, the Wall Street Journal reported. The lack of a standard definition between real estate funds and mutual funds — and within the real estate fund sector itself — makes comparisons problematic, if not impossible, and blurs how values reflect performance.

Shares of real estate funds are typically sold to individual investors through advisers, not traded on public exchanges, where stock prices are determined by the market. For non-traded REITs, the NAV determines how much investors pay and what they get when selling shares back to the fund.

For these funds, NAV is a misnomer, critics say.

“They should call it price,” Cox Capital Partners CEO John Cox told the Journal. “They should say, ‘This is our price per share’ and just leave it at that.”

Non-traded funds calculate their NAVs with help from advisers and appraisers, estimating the fair values of their assets. Valuation policies are disclosed, but along with broad disclaimers about treating NAV as an indication of funds’ financial condition.

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Among the variances from fund to fund in calculating NAV: liability subtractions, fair-value gains and losses on debt, the source of asset valuations and how often they’re updated.

Publicly traded REITs, which don’t report NAVs, have struggled as commercial property values have been ravaged by the pandemic and elevated interest rates. The MSCI US REIT Index is down 25 percent since the end of 2021.

Yet in the same period, the Blackstone Real Estate Income Trust’s NAV is up 2 percent, while Starwood Real Estate Income Trust’s NAV is down a modest 5 percent.

A Blackstone spokesperson said BREIT’s NAV would be “virtually identical” if it were governed by generally accepted accounting principles. The spokesperson also noted that a year ago the University of California’s investment arm bought $4.5 billion in shares at the NAV. That transaction came with major downside protection, courtesy of Blackstone.

Despite the potentially misleading nomenclature facing investors, the Securities and Exchange Commission doesn’t appear inclined to clamp down on nontraded REITs’ use of the NAV label, even though rules ban companies from submitting filings with “titles or descriptions of non-GAAP financial measures that are the same as, or confusingly similar to, titles or descriptions used for GAAP financial measures.”

Holden Walter-Warner