The best way to find a Non-Traded REIT is by searching its name in the "Add Investment" field. Modeling these investments poses a unique challenge because they are illiquid and do not have readily available pricing data. Further, utilizing a REIT’s NAV as “price history” has serious and ubiquitous consequences from a risk assessment standpoint. Other than creating a low-resolution representation of price volatility, it further simplifies the generic risk profile of Non-Traded REITs to that of a stable-value product whose value is little changed over time. As one might suspect, the realities of assessing the underlying risks of Non-Traded REITs are complicated and their risk profiles range from low to high risk. As a result, Non-Traded REITs in Riskalyze use a proprietary calculation to determine the risk profile presented.
Non-Traded REITs Methodology Overview
For traditional investments in Riskalyze, we incorporate daily or monthly price data, as appropriate, and dividends from a full market cycle; January 1st, 2008 to the most recent market close. As previously stated, Non-Traded REITs do not have regular pricing data, even if they strike monthly NAVs, and most did not exist prior to January 1st, 2008.
Our proprietary methodology for calculating the risk profile (return and volatility) for Non-Traded REITs assesses the following criteria:
- Short-Term Liquidity: A measure of near-term volatility, our methodology penalizes low liquidity levels.
- Return on Assets in Relation to the Weighted Cost of Debt: As a measure of levered loss, REIT’s where the use of leverage results in a negative contribution is penalized.
- Leverage: The use of leverage on a REIT’s balance sheet can accelerate both losses and gains, resulting in higher underlying volatility. REITs that utilize extensive leverage are penalized.
- Interest Coverage Ratio: REITs that can easily service their debt are rewarded whereas REITs that cannot are penalized.
- Dividend or Distribution Yield: For many of the alternatives on our platform we rely heavily on the stated dividend yield for our return expectation. REITs with stable or increasing dividends are rewarded while alternatives with unstable or stopped distributions are penalized.
- Funding Requirements for Offered Redemptions: REITs that offer Redemptions are not penalized. However, REITs which offer redemptions that also require substantial funding to fulfill their obligation to shareholders are penalized.
- Amount of Debt Maturing in the Near Future: A measure of rollover risk; as near-term debt obligations become due the obligations can either be met (through the liquidation or maturity of assets) or converted into new debt. REITs facing refinancing difficulties are penalized.
- Ratio of Fixed to Variable Rate Debt: REITs with substantial variable rate debt, and thus carry substantial interest rate risk, are penalized.
- Modified Funds From Operations (MFFO) Payout Ratio: A short-term indicator of sustainability, REITs that currently pay out initial shareholder equity and/or require funding to finance their dividends are penalized.
- Percentage of MFFO Paid Out in Distributions Since Inception (Excluding DRIP): A long-term indicator of sustainability, REITs that have (net, since inception) paid out initial shareholder equity and/or required funding to finance their dividends are penalized.