Exploring Carter Validus Mission Critical REIT’s Change in NAV
January 12, 2017 | James Sprow | Blue Vault
UPDATED: 5:00 p.m., January 12, 2017 (changes noted in italics below)
Carter Validus Mission Critical REIT filed an 8-K with the SEC on January 5, 2018, that announced its determination of an estimated net asset value (“NAV”) per share of $9.26 as of September 30, 2017, representing a drop of $0.76 per share from the previously determined NAV of $10.02 as of September 30, 2016. The letter to shareholders announcing the decline can be confusing and difficult to understand given the REIT’s past performance, as well as the capital gains associated with recent dispositions.
Some major portfolio moves, including property sales of over $1 billion since the September 30, 2017, valuation, can be expected to impact share values going forward, and Blue Vault would expect those sales to have a positive impact on future NAV estimates.
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In the January 5, 2018, filing, the REIT breaks out the per-share change in NAV as follows: |
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| Change in Portfolio Real Estate Value | $(0.49) |
| Other Offsets | $(0.16) |
| Transaction Costs Associated with Data Center Sales | $(0.11) |
| $(0.76) | |
One of the confusing aspects of the decline is the decline in the portfolio real estate value. The filing states that “While the change in Portfolio Real Estate Value above represents the change in the aggregate value of the Company’s 84 properties owned as of September 30, 2017, the largest declines in value were for the Walnut Hill Medical Center and the Miami International Medical Center. Further, the Company recently announced the completion of its disposition of a 14-property data center portfolio and of a 250,000 square foot data center in Chicago, IL, which were sold at a gain on investment at the portfolio level. Any appreciation from the original purchase price of these data center assets was reflected in the Company’s prior estimated per share NAV of $10.02 as of September 30, 2016 (the “2016 Estimated Per Share NAV”), and that the final sale prices reflect a decline from the 2016 Estimated Per Share NAV.”
So, in brief, the prior NAV per share had higher property values attributed to the two medical center properties as well as the 14-property data center portfolio. The “Other Offsets” include distributions in excess of earnings, which are due, in part, to write-offs and reserves associated with the Miami International Medical Center, the Walnut Hill Medical Center and the Cumberland Surgical Hospital.
The September 30, 2017, valuation of the REIT’s portfolio was estimated by third-party appraisals by Robert A. Stanger, & Co. who provided a value on 62 of the 84 properties in the REIT’s portfolio as of September 30, 2017, as well as third-party appraisals of 18 properties that were subject to pending purchase and sale agreements, net of transaction costs. Stanger also provided estimated values for the Company’s consolidated and unconsolidated joint ventures, the Company’s subordinated participation in net sales proceeds due upon the liquidation of the Company’s portfolio, and other liabilities and notes receivable.
Looking at the assumptions used in the most recent valuation, it is clear that changing capitalization rate assumptions played a role in the decline in the estimated net asset value per share. Because appraisers use discounted cash flows to arrive at estimated property values, higher capitalization rates and higher discount rates will result in lower property value estimates, other things equal. This appears to be the case with the most recent NAV estimate for this REIT. Below are the capitalization rates and discount rates used in the valuation for September 30, 2017, versus the rates used in the September 30, 2016 valuations:
| Rates Used in Appraisals | Weighted Average 9/30/2017 |
Weighted Average 9/30/2016 |
Effect on Portfolio Value |
| Terminal Capitalization Rate | 7.60% | 7.75% | Slight Increase |
| Cash Flow Discount Rate | 8.63% | 7.91% | Large Decrease |
| Residual Discount Rate | 8.33% | 8.38% | Slight Increase |
| Direct Capitalization Rate | 6.99% | 6.90% | Slight Decrease |
The same properties were in the Company’s portfolio at September 30, 2016 and September 30, 2017. The 2016 value of these properties was estimated at $2.704 million and dropped to $2.611 million in 2017, a decrease of just 3.4% but resulting in a $0.68 per share decrease in NAV.
In a previous posting of this article, we referred to the liquidation of a preferred equity investment valued at $131.3 million as a contributor to the decline in the per share NAV. After discussing this transaction with the REIT’s management, it is clear that the redemption of the preferred equity investment and the use of the proceeds to reduce the REIT’s debt, on a net basis did not have a significant impact on the REIT’s NAV per share. Nearly equal reductions in both assets and liabilities due to this redemption did not impact shareholder equity significantly. Blue Vault was correct in observing that the proceeds were used to pay down debt, but incorrect in stating that the $0.71 per share value of this investment in the September 30, 2016, statement and $0.00 value in the September 30, 2017, statement had a significant net effect on the per share NAV. We regret this misinterpretation. The most significant impact on the REIT’s per share NAV was the decline in the appraised values of its real estate investments.
Carter Validus Mission Critical REIT Inc., through an affiliate sold the Miami Medical Center campus near Miami International Airport for $88 million to Variety Children’s Hospital, an affiliate of Nicklaus Children’s Hospital. The hospital shut down in October 2017. The fact that the hospital shut down certainly affected the appraised value of that property as of September 30, 2017, and is mentioned specifically by the Company in explaining the drop in NAV. The sale appears to have closed in late December, 2017, or early January, 2018.
The property, at 5959 NW Seventh St. in Miami, has 176,579 square feet, as well as a parking lot connected to the property via a bridge, and is just one-half mile from Miami International Airport. Carter Validus purchased the property for about $48.6 million in 2014, according to the Company’s SEC filings. The hospital included 67 private rooms and 12 operating rooms. It was founded in 1963 by exiled Cuban doctors, and was formerly known as Pan American Hospital.
On December 20, 2017, Carter Validus Mission Critical REIT Inc. also completed the $750.0 million sale of a 14-property data center portfolio to an affiliate of Mapletree Industrial Trust and Mapletree Investments Pte. Ltd. The aggregate square footage of the portfolio of properties totaled approximately 2.25 million square feet.
The company said that in connection with the deal, it repaid roughly $170.0 million in property- and company-level principal debt. As stated in the 8-K announcement of the NAV revision, this sale was already factored into the REIT’s portfolio valuation at September 30, 2017, as it was under contract at that time.
On December 14, 2017, the REIT completed the sale of the Chicago Data Center for $315.0 million, with net proceeds of approximately $206.9 million after repaying it mortgage loan. The Data Center was held on the Company’s balance sheet at an aggregate book value of approximately $227.3 million.
On December 22, 2017, the Board of Directors, in a letter to shareholders, recommended that an unsolicited tender offer by Everest REIT Investors II, LLC, be rejected. The offer was for up to 9,325,000 shares at a price of $8.00 per share.
Carter Validus Mission Critical REIT is clearly in the process of executing its strategy of liquidating its investment portfolio. It will be interesting to see if the September 30, 2017, estimated NAV per share was indicative of the value shareholders can expect to receive as the liquidation continues, or whether the appraisal values were conservative, based upon higher discount rates and write-offs related to a few of the REIT’s properties.
On December 20, 2017, Carter Validus Mission Critical REIT Inc. also completed the $750.0 million sale of a 14-property data center portfolio to an affiliate of Mapletree Industrial Trust and Mapletree Investments Pte. Ltd. The aggregate square footage of the portfolio of properties totaled approximately 2.25 million square feet.
The company said that in connection with the deal, it repaid roughly $170.0 million in property- and company-level principal debt. As stated in the 8-K announcement of the NAV revision, this sale was already factored into the REIT’s portfolio valuation at September 30, 2017, as it was under contract at that time.
On December 14, 2017, the REIT completed the sale of the Chicago Data Center for $315.0 million, with net proceeds of approximately $206.9 million after repaying it mortgage loan. The Data Center was held on the Company’s balance sheet at an aggregate book value of approximately $227.3 million.
On December 22, 2017, the Board of Directors, in a letter to shareholders, recommended that an unsolicited tender offer by Everest REIT Investors II, LLC, be rejected. The offer was for up to 9,325,000 shares at a price of $8.00 per share.
Carter Validus Mission Critical REIT is clearly in the process of executing its strategy of liquidating its investment portfolio. It will be interesting to see if the September 30, 2017, estimated NAV per share was indicative of the value shareholders can expect to receive as the liquidation continues, or whether the appraisal values were conservative, based upon higher discount rates and write-offs related to a few of the REIT’s properties.
Learn more about Carter Validus on the Blue Vault Sponsor Focus page.
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