Take for instance the portfolio of a REIT valued at $100 and has a loan-to-value (aggregate leverage) of 40%. A 10% decline in asset value would result in a 16.7% decline in NAV. With a 50% LTV, the REIT’s NAV would fall by 20%.
United Hampshire US REIT’s (UH REIT) unit price is down 4.4% this year. Although this may not be great, investors should compare it with the performance of US office REITs. Keppel Pacific Oak US REIT’s (KORE) unit price is down 51% while Prime US REIT’s unit price has lost 66%. The numbers do not even describe what is going on with Manulife US REIT (MUST), which is struggling to survive.
Why? When valuations decline, the value of assets under the management of REITs declines too. However, the impact of this decline is not the same for asset value and net asset value (NAV). Analysts have indicated that NAV falls a lot more for a small decline in portfolio value.
