How are non traded REIT shares valued when there is no market price?

A non traded REIT has no readily available market price, so its per share value is an estimate built from property appraisals, less liabilities, divided across the shares of each class. Appraisals arrive periodically or on a rolling cycle, so the figure can be late or stale at the moment it is published. The price a new investor pays can also differ from that estimate, because the offering price may add commissions and fees to NAV.

What fills the gap when no exchange sets a price

Shares of a non traded REIT are sold directly to investors, are not listed on a national securities exchange, and have limited secondary markets. With no continuous two sided market, nothing records what a willing buyer and seller would agree on today.

The substitute is an appraisal based estimate. Valuations rest on periodic or annual property appraisals, which can be inaccurate or untimely.

A veteran reads the reported number as a model output with a measurement date. It carries the assumptions of the appraiser and the timing of the appraisal cycle, and it does not carry the information a trading market absorbs daily.

The arithmetic has three steps. Appraised property values and other assets are added up, liabilities such as mortgage debt are deducted to reach net asset value, and that amount is allocated to each share class and divided by the shares outstanding in the class.

Debt magnifies appraisal changes at the equity level. A fixed liability sits underneath the asset total, so a given percentage move in appraised value produces a larger percentage move in NAV. The worked example below shows the size of that effect.

Share classes matter because fees and expenses can differ by class, so one fund can report more than one per share figure on the same date.

Rolling appraisals and what a published date covers

NAV REITs commonly publish a value on a schedule ranging from daily to quarterly, based in part on valuations from independent third parties. Many appraise each asset on a rotating cycle, so every property is revisited on a schedule.

A rotating cycle means a monthly NAV is not a monthly appraisal of the whole portfolio. At any publication date, some properties are carried at an appraisal from earlier in the cycle, and others at a fresh one.

The practical test is the age of each input, because the publication date only tells a reader when the arithmetic was run.

Why the price paid can sit above NAV

The transaction price is a separate figure from NAV. In one prospectus structure, each class is sold at a transaction price that is generally the prior month NAV per share for that class, plus applicable upfront selling commissions and dealer manager fees.

A new investor therefore starts with a holding worth less than the amount paid, measured at NAV, before any change in property values.

Earlier non traded structures worked differently. They offered shares at a fixed price during a continuous offering that usually ran two to three years, with upfront selling commissions of 7 percent and dealer manager fees of 2 to 3 percent. A fixed price of that kind was an offering term and carried no fresh appraisal behind it.

The stretch before any estimate exists

Non traded REITs typically do not provide an estimate of value per share until 18 months after the offering closes.

A holder in that interval has a subscription price and no reported estimate to compare it with. Statements may still show the original offering price, which reflects the offering terms and says nothing about current property values.

“Non-traded REITs typically do not provide an estimate of their value per share until 18 months after their offering closes.”
Real Estate Investment Trusts (REITs), SEC Investor.gov

Worked example: a hypothetical $500,000,000 REIT after a 5 percent appraisal decline

A hypothetical single class REIT carries appraised property and other assets of $500,000,000 against liabilities of $250,000,000, with 10,000,000 shares outstanding. NAV is $500,000,000 minus $250,000,000, or $250,000,000, which is $25.00 per share.

Assume upfront selling commissions and dealer manager fees of 4 percent of NAV per share, or $1.00. The transaction price is $25.00 plus $1.00, or $26.00 per share.

Base case: an investor subscribes $260,000, which is 10,000 shares at $26.00. At NAV, those shares are worth 10,000 multiplied by $25.00, or $250,000. The gap of $10,000 is the upfront charge.

Stressed case: the same $260,000 buys the same 10,000 shares, and a later appraisal cycle lowers property values by 5 percent. That is $25,000,000 off $500,000,000, leaving $475,000,000 of assets. With liabilities unchanged at $250,000,000, NAV falls to $225,000,000, or $22.50 per share.

The holding is now worth 10,000 multiplied by $22.50, or $225,000, a gap of $35,000 against the $260,000 paid. A 5 percent decline in appraised assets cut NAV by $25,000,000 out of $250,000,000, which is 10 percent, because the liabilities did not shrink.

Both cases use the same capital, the same fee and the same share count. The comparison isolates the appraisal change and ignores distributions, redemption terms and later fees.

Mistakes in reading a non traded REIT value

Treating NAV as a market quote equates an appraisal based estimate with a price discovered by trading. Because no readily available market price exists, NAV cannot show what a buyer would pay on a given day.

Comparing the subscription price directly with NAV per share folds the selling commissions and dealer manager fees into the apparent value. Where the transaction price is prior month NAV plus those charges, the gap on day one equals the charges, as the example shows.

Reading a monthly or quarterly NAV as a same day revaluation of every asset overlooks rotating appraisals. Some properties are carried at earlier appraisals, so the published figure blends inputs of different ages.

Applying the percentage change in property values to NAV understates the equity effect when liabilities are fixed. In the example, a 5 percent drop in assets produced a 10 percent drop in NAV.

Expecting an estimate from the first day of an offering ignores the interval that typically runs until 18 months after the offering closes. During that interval, the only per share number on a statement may be the original offering price.

What date does the NAV measure? The measurement point fixes the period to which the estimate applies.

Which properties carry current appraisals and which sit on an older point of a rolling cycle? The answer shows how much of the published figure reflects stale inputs.

Were liabilities deducted before dividing by shares? NAV is assets less liabilities, allocated to the applicable class.

Does the transaction price equal NAV per share? Some structures add selling commissions and dealer manager fees to prior month NAV.

Which share class does the per share figure describe? Both the transaction price and the NAV calculation can be class specific.

How long after the offering closed did the first estimate appear? A gap of up to 18 months can leave holders without a reported estimate.

Is the figure an exchange price or an appraisal based estimate? Non traded REIT shares have no readily available market price.

What would a trading market set for a comparable listed REIT? Listed shares are priced by the trading market, which gives a comparison point that appraisals do not provide.