Why NAV should be calculated by a trusted source

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Brian D. Milovich

Managing Principal, Calvera Partners

Net Asset Value, or NAV, is the foundation of all non-traded REIT investments. It determines the equity value of an investment. How non-traded REITs derive their NAV has been the subject of many news articles lately. But while NAV is important, it’s almost never correct. 

Let’s start with BREIT which is often in the news. BREIT is Blackstone’s behemoth of a non-traded REIT. Its value has not fallen as much as public REITs, or even some of its non-traded REIT peers. BREIT’s NAV peaked at $15.11/share in September 2022. In December 2023, its NAV was $14.10/share. That’s a ~7% drop while apartment values have declined 20-30% in the same timeframe. BREIT isn’t just invested in apartments, but it does have a major concentration in them. This simple comparison has left many scratching their heads. 

I, too, am curious how that happened. What are the assets that make up NAV and do we understand them? The underlying real estate is asset number one. Without underwriting each property yourself, we must get comfortable with Blackstone’s analysis. Still, shouldn’t the portfolio be worth less? BREIT has been selling properties to raise funds–some at thin profits. They also own in markets that are receiving waves of new supply. These are issues shared by the market in general. 

Examining further, interest rate caps have a big influence on BREIT’s NAV. Interest rate caps are derivative contracts that cap the interest rate on a floating-rate loan. BREIT has many floating-rate loans and thus owns many interest rate caps. In 2021, these were a cost of doing business and not assets that created excess value. That was, until interest rates spiked. A cap purchased in late 2021 is worth significantly more today. As rates drop and time passes, it’ll be worth less. I doubt the average BREIT investor expected derivative values to sway NAV. 

It’s fair to question Blackstone’s methodology and even disagree with it. Through key provisions like redemption rights, investors can decide what to do. So, just like with owning a public stock, if you think their NAV is overstated, you can sell your interest. That’s what many astute wealth managers have done. Conversely, if you think the NAV is understated, you can buy more shares. 

Unlike the stock market, where share values are efficiently priced, non-traded REITs calculate NAV in many ways. Some perform third-party appraisals on every property. This can be a true arms-length analysis. Often, though, it’s influenced by the one ordering the appraisal. Additionally, appraisals are backwards-looking and may not reflect current values.  

Some might use broker opinion of values (BOVs). This could result in an inflated NAV. Brokers are motivated to entice owners to sell by delivering a high BOV. Despite their close pulse on the market, brokers, by themselves, are not best for NAV purposes. 

Other REITs calculate NAV in-house, which is what we do for our REIT. Our methodology uses inputs from both the broker and appraiser communities. For extra scrutiny, an independent auditor reviews our NAV models. This is to ensure the result conforms to market standards. This is our preferred way to calculate NAV. 

Yet, not one of these methods will produce the correct market value of a property. The only way to do that is to be under contract to sell. Instead, our industry relies on a variety of methods to achieve a best efforts value.  

Even a public REIT’s stock price can deviate from NAV or “book value.” When a REIT stock trades at a discount to NAV, it becomes an acquisition target. If it trades at a premium to NAV, the market expects higher growth. There are reasons to sell or buy in either instance.  

Ultimately, getting comfortable with a valuation entails understanding what you’re invested in. Then use that information to calculate your own valuation. Additionally, your relationship with the REIT sponsor is vital. If they provide transparency and they’ve earned your trust, that may be all the extra comfort you need. 

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