RW Holdings NNN REIT Inc., a publicly registered non-traded real estate investment trust formerly known as Rich Uncles NNN REIT Inc., has declared a net asset value per share of $7.00 for its Class C and Class S common stock, as of April 30, 2020. The company also lowered its distribution rate, citing known and potential lost rental income due to current market circumstances amid the COVID-19 pandemic.
This is the fourth valuation of the company’s common stock. Its previous NAV per share was $10.27 as of December 31, 2019, and earlier NAVs per share were $10.16 as of December 31, 2018 and $10.05 as of December 31, 2017.
The NAV per share is based on an estimated market value of the REIT’s assets less the estimated market value of its liabilities, divided by the number of fully diluted Class C and Class S shares outstanding as of April 30, 2020.
“Despite an inability to predict the extraordinary market conditions caused by COVID-19, we knew it was imperative not to ignore this black swan event and its potential impact on our net asset value per share…,” the company said in a letter to shareholders. “No real estate portfolio is completely immune to recent events. The sooner we know where we stand, the sooner we can take positive action to improve upon the situation.”
Additionally, the company said that in light of known and potential lost rental income due to current market circumstances, it has revised its distribution rate to $0.35 per share per year, paid monthly. This is equal to 5.0 percent annually based on the new NAV per share. The previous annualized distribution for Class C and Class S common stock was $0.70 per share.
Cushman & Wakefield Western Inc., an independent third-party real estate advisory and consulting firm, assisted with the valuation, which the company said was performed in accordance with Institute for Portfolio Alternatives guidelines.
Cushman & Wakefield determined a valuation range of $7.00 to $9.30 per share.
The REIT pointed to five categories that impacted the NAV per share decline, including a market change in the cap rates assigned to net lease assets, lease expirations occurring over the next three years, potentially longer than normal lease-up times for vacant properties, the write-down of 24 Hour Fitness, and a reduction in goodwill on its balance sheet – all detailed below.
The company witnessed average cap rates for performing assets move from 6.8 percent to 7.7 percent. Cap rates and property values have an inverse relationship – the higher the cap rate, the lower the implied property value.
The REIT owns 11 properties that have leases subject to renewal in the next three years, including eight office buildings. The increased probability of non-renewal, or lower rent upon renewal, as tenants re-evaluate their space needs in light of social distancing/work from home protocols has resulted in lower valuations for these properties.
The REIT has two office/industrial properties located in California and Texas where the tenants have vacated. The company said that given the current weakness in the economy, the appraisals reflect a longer time to find replacement tenants and the increased likelihood of lower rental rates.
The REIT own a 45,000-square foot gym, located in Las Vegas that is leased to 24 Hour Fitness. The company believes that 24 Hour Fitness will soon be filing for bankruptcy, following the recent bankruptcy of Gold’s Gym. “We have been informed by representatives of 24-Hour Fitness that they will be seeking to reject our lease should they enter into bankruptcy proceedings, the company said. “As such, we have taken a material impairment charge to reflect the likely loss of equity and repayment of a debt guarantee.”
Given the declines in real estate values, and in accordance with generally accepted accounting principals, the company was required to take an impairment charge to goodwill on its balance sheet.
The company collected more than 90 percent of rental income in April, while May collections (which are still ongoing) show a potentially declining trend. Additionally, approximately 30 percent of its tenants are seeking lower rents and it expect additional rent relief requests will come. The REIT noted that it has granted relief in situations where not doing so would be detrimental to the long-term health of its investments.
“To the best of our ability, we believe that the new NAV per share and dividend distribution rate reflect the knowable impact of the COVID-19 pandemic on the NNN REIT portfolio,” the REIT added. “Barring unforeseen or extenuating circumstances, we believe our portfolio is now appropriately positioned for potential upside associated with any future recovery. We do not know the timing or velocity of a future recovery, but history has shown us, in every instance, that real estate does recover and remains one of the better long-term asset classes to be held in a diversified investment portfolio.”
RW Holdings NNN REIT previously indicated that the pandemic has impacted its ability to file its quarterly financial report for the first quarter of 2020, due on May 15, 2020, and expects to file no later than June 29, 2020. In addition, the REIT recently suspended its primary offering, which it indicated is temporary, while its distribution reinvestment plan and share repurchase program remain open at this time.
RW Holdings NNN REIT recently merged with an affiliated non-traded REIT, Rich Uncles Real Estate Investment Trust I. The company’s real estate portfolio totals 2.4 million square feet and consists of 45 properties (comprising 19 retail properties, 14 office properties and 12 industrial properties) located in 14 states. The portfolio also includes one parcel of land, which currently serves as an easement to one of the company’s office properties; and an approximate 72.7 percent tenant-in-common interest in an office property in Santa Clara, California.