What’s a Real-Estate Fund Worth? Depends on Who’s Doing the Math

The term “net asset value,” or NAV, is so commonplace for anyone buying a mutual fund, investors hardly give it a second thought. It has a standard definition. The number is audited annually. There is rarely a reason to question it.

But in a corner of the market that has grown rapidly—real-estate funds—the NAV label, while ubiquitous, doesn’t have the same meaning. In most cases the funds, known as nontraded real-estate-investment trusts, have broad leeway to define their NAV measurements however they want.

This raises issues of comparability between NAV measures at different funds. It also can lead investors to question whether values at some funds realistically reflect the performance of their underlying assets. Both have become a concern for investors since rising interest rates began hurting many commercial real-estate values.

Shares of publicly traded REITs, which typically don’t report NAV, have plunged; the MSCI US REIT Index is down 25% since the end of 2021. Yet NAVs have shown little volatility at some of the biggest nontraded REITs focusing on commercial real estate. The NAV per share at Blackstone Real Estate Income Trust, known as Breit and the biggest of these kinds of funds, is up 2% since the end of 2021, and Starwood Real Estate Income Trust’s is down 5%.

Investors in some cases have rushed to sell shares, prompting several funds to curb redemptions. Blackstone, for example, said last week that November repurchase requests for Breit were $1.8 billion and that it fulfilled $1.2 billion of these.

Requests have been falling steadily this year. In January, Breit repurchased $1.3 billion of shares, but requests were four times that amount. The fund has capped redemptions for 13 consecutive months and restricts withdrawals to 2% of NAV per month and 5% per quarter.

How such funds calculate NAV is of particular importance to investors because, unlike publicly traded REITs, their shares don’t trade on exchanges. They are sold mainly to individual investors through financial advisers. The NAV sets the price, and investors sell shares back to the company at the NAV. A limited secondary market exists, but transactions usually occur at a discount to NAV.

“Shareholders assume they know what the term ‘net asset value’ means and that it’s applicable across all product types. But the definition of net asset value can vary,” said John Cox, founder and chief executive officer of Cox Capital Partners in Philadelphia, an investment manager that specializes in nontraded funds. He said his firm bought shares of Breit and other nontraded REITs at discounts on the secondary market earlier this year.

“A lot of our business is based on explaining why NAV is not an indication of fair market value,” Cox said. “They should call it `price.’ They should say, ‘This is our price per share’ and just leave it at that.”

So how do many nontraded funds calculate NAV?

Generally, they say they estimate their assets’ fair values when calculating NAV with help from outside advisers and appraisers. They disclose lengthy valuation policies describing their methodology and include broad disclaimers.

“NAV calculations are not governed by governmental or independent securities, financial or accounting rules or standards,” Breit said in its latest annual report. “Further, there are no accounting rules or standards that prescribe which components should be used in calculating NAV, and our NAV is not audited by our independent registered public accounting firm.”

Starwood REIT and other nontraded REITs included the same language word for word in their annual reports.

Many also include cautionary language in their disclosures disavowing that their NAV metrics reflect their financial condition. The annual reports by Breit, Starwood REIT and others go on to say: “We calculate and publish NAV solely for purposes of establishing the price at which we sell and repurchase shares of our common stock, and you should not view our NAV as a measure of our historical or future financial condition or performance.”

Under generally accepted accounting principles, NAV per share for open-end mutual funds and other registered investment companies is a balance-sheet measure of net worth; it isn’t just price.

According to fund filings, there are many adjustments nontraded REITs make to calculate non-GAAP NAV. Some don’t subtract all their liabilities. Some include fair-value gains and losses on their own debt; others don’t. Some update their real-estate assets’ values more frequently than others or rely more heavily on third-party firms to value them.

A spokesman for Starwood declined to comment. Blackstone said that “if Breit’s NAV was governed by GAAP accounting, the result would be virtually identical” and that “our valuations are further supported by the fact that Breit has sold more than $16 billion of assets across 321 properties at a premium to NAV since 2022, when interest rates began to rise.”

Blackstone also pointed to a transaction announced in January in which the University of California’s investment arm bought $4.5 billion of Breit shares at their published NAV.

However, UC Investments’ purchase came with a big concession. Blackstone also pledged $1.1 billion of its own Breit shares to pay UC Investments in case it failed to earn 11.25% a year after fees over a six-year holding period. Ordinary Breit shareholders aren’t offered such downside protection.

Some investors say the practice of using the NAV label on a non-GAAP financial measure might cause confusion. Securities and Exchange Commission rules prohibit companies in their filings from using “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.”

The SEC hasn’t moved to stop the practice by nontraded REITs, notwithstanding its rule, passed in 2003 after a wave of accounting scandals. An SEC spokeswoman declined to comment.

Ted Christensen, a University of Georgia accounting professor, took issue with the practice. The NAV labeling, he said, “is similar to a company calculating a non-GAAP earnings metric and calling it ‘net income.’ ”

Write to Jonathan Weil at [email protected]