NAV Shenanigans
How Invesco's INCREF Uses the Mothership to Push NAV & Fees
Summary
This week, I’m taking a closer look at the non-traded Invesco Commercial Real Estate Finance Trust, Inc. (“INCREF”). Specifically, I’ll dive into:
What Mortgage REIT short-sellers missed.
Why CRE debt looked attractive for non-traded vehicles.
How Invesco uses its size to create NAV gains.
Why sponsor-derived prices undermine investability.
Mortgage REITs (MREITs) have attracted outsized attention this year thanks to well-circulated short reports from Viceroy and Muddy Waters focusing on Arbor ABR 0.00%↑ and Blackstone Mortgage Trust BXMT 0.00%↑ , respectively. These shorts, speaking mildly, have not worked.
On the surface, MREITs are not complicated businesses. They leverage their equity to make real estate loans and, like banks and BDCs, earn a spread between their cost of capital and their loans. What makes them challenging is that they offer only the highest level of insight into their loan books.
Short-sellers used the make-up of MREIT CLOs to make broad judgments about the entirety of the loan book. MREITs utilize CLOs as a funding mechanism, which provides greater disclosure to the underlying loans but they are often filled with bridge loans that can be at the lower end of the credit spectrum.
While loans originated in the heady days of 2021-2022 certainly faced challenges, newly issued CRE debt has much better risk-reward characteristics. New loans are being issued below peak valuations with lower loan-to-values. The attractiveness of new mortgage debt and an overall appetite for investments that could reasonably check the “credit” box was ultimately the blind spots that undermined the shorts. Provided capital markets stayed open to MREITs, loan book issues could be slow-rolled, while newly issued loans would gradually improve the overall credit profile.
With the optical allure of distress but robust investor appetite, it is no surprise that large asset managers saw an opportunity to launch quasi-private non-traded structures to capitalize on a product whose strategy could be pitched as simultaneously contrarian yet well-understood. Thus, the Invesco Commercial Real Estate Finance Trust (INCREF) launched in the summer of 2023.
Charlie Rose, lead portfolio manager of INCREF and global head of credit for Invesco, told WealthManagement.com,
“We’re bringing this product to the accredited investor community because we’re hearing from financial professionals that the premium income profile and limited volatility, historically, of the asset class is attractive to high-net-worth investors throughout market cycles, but particularly through this period of uncertainty,”
The portfolio, which focuses on multifamily, industrial, and self-storage, has originated loans at a weighted average rate of nearly 8%, but I’m not going to focus much on the portfolio. Instead, I will dive into the distributions and reported Net Asset Value (NAV) to date.
Redemption freezes in Blackstone’s non-traded real estate vehicle BREIT were a huge story last year (aptly covered by my colleague
here). Those redemptions called into question Blackstone’s methodology for arriving at NAV -- the “price” at which new shares were sold, but more crucially, the value on which management fees were charged. As public REIT valuations fell, BREIT’s NAV steadily rose. In question were the assumptions used for capitalization rates, which were further complicated by a discount rate step that made ascertaining sub-asset class valuations challenging. At some point, the spread became too glaring, and when investors asked for their money back, Blackstone said “No,” or rather, “Not Yet.”Loan valuations are less susceptible to wishful thinking. Since INCREF’s loans are all floating rate, provided they are current and expected to stay current, they are valued at their outstanding balance. Still, the bully pulpit of a sponsor-derived NAV has proven too tempting for Invesco, and they have mired the seemingly straightforward calculation with related party transactions that create a growing headwind.