Rich Uncles' NNN REIT, the private real estate investment trust (REIT) funded via online crowdfunding, is feeling the impact of the coronavirus pandemic on its value and cash flows. In a recent email and SEC filing, the company announced that the net asset value, or NAV, of the REIT had been reduced to $7 per share following the revaluation of its real estate assets by Cushman & Wakefield (NYSE: CWK). That's a 30% reduction in value from the $10 per share value investors paid to buy shares. NNN REIT also said it was cutting the dividend to an annualized $0.35 per share going forward.
Commercial property cap rates taking a hit
NNN REIT has a large portfolio of commercial properties, and the bulk are under long-term leases with tenants that have continued to meet their obligations. According to CEO Aaron Halfacre, the company had received more than 90% of April rents as of May 28, but "May collections are on track to be worse."
Halfacre indicated that about 30% of NNN REIT's properties are leased to tenants that have either relatively near-term lease expirations or have stopped paying rent entirely. The most painful example is a 24 Hour Fitness property in Las Vegas the company owns. 24 Hour Fitness has stopped paying rent on all 400 gyms it owns and is expected to enter bankruptcy proceedings in the near future, including seeking a rejection of its lease.
NNN REIT has been given some small short-term relief by the mortgage holder on the property, but Halfacre said on a call with investors that this property could be foreclosed. NNN REIT already booked more than $6 million in lost asset value due to the revaluation of the property.
As a result of the near-term lease expirations and general commercial real estate market conditions, NNN REIT's new valuation reflects the reality going forward: Many of its properties with expiring leases in the near term very likely won't be released at the same rates. Halfacre said that 20% of the decline in NAV was from 11 properties with leases expiring in the next three years.
The likelihood of reduced future rents for properties with near-term lease expirations is taking a big bite out of NNN REIT's value. The cap rates -- that is, the net operating income a property can generate divided by the current market value of the property -- for its real estate assets are already on the rise as potential tenants cut back on spending and reevaluate their needs in the ongoing coronavirus environment.
Riding out the now and preparing for the recovery
NNN REIT is preparing for the uncertainty and the economic impact of a protracted downturn on commercial real estate. The updated valuation of its properties reflects the new reality, as does the lowering of the dividend. As Halfacre said, rents held up in April -- though many came in later -- but have started to deteriorate further into May as more tenants feel the brunt of the shutdown.
The company has also had more than 30% of its tenants ask for rent relief and has seen more tenants with leases expiring in the next few years submit requests for proposal (RFPs), indicating their intent to shop for new properties and aggressively negotiate for lower rates.
Halfacre also pointed out that, historically, economic downturns have created opportunity. Cap rates are on the rise (they move inversely with property and rent values, so higher is bad for property owners), but commercial real estate values have reached record levels after every prior economic downturn.
The company closed NNN REIT to investors on May 8 in anticipation of the new, lower NAV but plans to reopen it to new investment in June at the new $7 per-share level. Halfacre also said that the company intends to honor share redemption requests in the near future for investors who want to sell.
However, these redemptions will be based on the company having sufficient cash to honor. And that will almost certainly depend on there being more investors with an appetite to buy into a business that was valued at $10 per share before the coronavirus crisis on the expectations that Halfacre will prove right and that commercial real estate will, indeed, bounce back after this crisis is over.