Last month, nearly 600 attended the Real Estate Investment Securities Association’s (REISA) national spring conference in San Diego, CA where non-traded REITs took the spotlight. The message they delivered was clear: non-traded REITs need to continue to implement best practices to reduce fees, improve transparency and bring more investors to the industry. The biggest task at hand is unlocking shareholder equity by making good on the $39 billion in liquidity events being considered by companies in the non-traded REIT space.
One panel in particular including Andrew Hyltin of CNL Financial Group, Nick Schorsch of ARCP, and Dan Goodwin of Inland Cos. drove home the point that the bigger the non-traded REIT market becomes the more efficient the transactions. “There’s $39 billion of non-traded REITs looking for liquidity today. This year, there will be $18 billion, maybe $20 billion in liquidity events — the highest in this industry’s history, and about a 70% premium to 2012,” said Schorsch, considered perhaps the non-traded sector’s most visible and vocal advocate.
While mergers and acquisition activity among their publicly traded REIT counterparts is expected to remain relatively quiet, the panelists agreed that the non-traded REIT sector will continue M&A with private companies and portfolios, launching IPOs in the resurgent capital market as funds reach their liquidity events.
Non-traded REITs continue to gain traction in the broader markets with more and more headline news. Most recently, the non-traded REIT sector attracted quite a bit of interest in the weeks leading up to the conference after Mr. Schorsch’s firm offered $9.7 billion to acquire its triple-net lease property rival Cole Credit Property Trust III, Inc. (CCPT III) in a very public, very contentious three-week board battle. Cole Credit passed on the unsolicited offer and purchased its investment manager, Cole Holdings Corp., in an internalization transaction for $127 million.
CCPTIII CEO Marc Nemer’s plan to take the REIT public on the New York Stock Exchange in June is seen as a key litmus test for shareholders’ approval for such internalization transactions as a way to access the public markets, and for the non-traded REIT sector in general.
Mr. Schorsch predicted that “The Cole IPO will be great for the industry.”
Mindful of the attention the non-traded REIT sector has been receiving as of late, many of the non-traded REIT sponsors made it a point to highlight the improvements to their business practices over the last several years, including lower fees, increased transparency and better investment performance of more recent offerings compared with pre-2007 offerings.
The Opposition
While non-traded REIT management touts its new best practices, Wall Street views the recent improvement in performance “mainly as a function of timing” that reflects appreciation of CRE values over the last four years according to Citi Group’s REIT analysts, who were attending New York University’s Schack Institute of Real Estate annual REIT M&A symposium in Manhattan around the same time.
Meanwhile, financial industry regulator FINRA is considering new rules that would require net asset value (NAV) updates, which some funds are beginning to provide. The panel in San Diego, unsurprisingly, disagreed with that assessment and other complaints about poor performance, arguing that critics aren’t making apples-to-apples comparisons on investor returns.
Inland’s Dan Goodwin defended his company’s performance, saying its two non-traded REITs have posted the highest growth rate measured by total returns among their retail REIT sector peers. “We’re first and third among all 27 retail REIT in total returns for 2012 and 2013,” Goodwin said. “Those are non-listed products and they’re outperforming the actual traded products that did the IPOs.”
Goodwin noted that traded REITs that launched IPOs are burdened with commissions and fees from investment bankers, accountants and attorneys averaging 9%. “That’s something that Wall Street doesn’t like to focus on when they compete with the unlisted REIT industry — that financial planners are providing all these services as part of the commission for our REITs. That needs to be emphasized,” he said. Prices and financial performance of non-traded REITs during and after the recession are comparable with their public peers.
More Non-Traded REITs Finding Liquidity
Another non-traded, triple-net-lease REIT intends to list on a stock exchange, making 2013 another impressive year for such real estate investment trusts. Chambers Street Properties, with $3.2 billion in assets, intends to list on the New York Stock Exchange on or about May 21. The REIT, which launched in 2006 and was formerly the CB Richard Ellis Realty Trust, has equity of a little under $2.5 billion.
Chambers Street’s announcement of a listing comes after Cole’s two triple net lease REITs, Cole Credit Property Trust II and Cole Credit Property Trust III, also announced working on “liquidity events.” In the non-traded REIT industry, “liquidity event” means giving investors the ability to cash out their formerly illiquid shares through a merger, acquisition, or listing.
Triple-net-lease REITs, in which high-quality tenants and not the REIT sponsors are responsible for maintenance, insurance and tax costs for the properties, have been a favorite of investors and financial advisers seeking income in a near zero interest rate environment. Triple-net-lease and, not surprisingly, healthcare related real estate portfolios have been seeing some of the best premiums in the traded markets as of late.
As more and more liquidity events transpire, investors have begun to capture gains generated over the last several years as many portfolios were able to buy into depressed markets and take advantage of a recovering real estate market. Healthcare Trust of America (HTA), American Realty Capital Trust (O), and American Realty Capital Trust III (ARCP) look to be the first of many non-traded REITs to go full cycle and obtain liquidity events for shareholders. This growing market is one that continues to improve in regards to best practices and is one that South Coast continues to keep a close eye on.
-Posted by Chris
Disclosures:
Non-traded REITs are considered by many to be a viable option for tax-sheltered income for investors seeking yield. There are a number of risk factors to consider with non-traded REITs. Non-traded REITs begin paying investors a distribution as soon as they are sold, with the distribution often initially coming from an investors’ principal or borrowed money. Such distributions are one of the most attractive elements of the product. Non-traded REITs are available only to suitable investors, and investing criteria varies by program. Prior to investing in any program, the prospectus should be reviewed in its entirety and all risks should be considered. South Coast recommends speaking with an investment professional before any financial decisions are made.
Sources:
http://www.reit.com/~/media/DataResearch/NCREIF_NAREIT_Executive_Summary_2q12.ashx
http://www.investmentnews.com/article/20130430/FREE/130439992
http://www.americanrealtycap.com/
http://www.inlandrealestate.com/
Photos:
Bloomberg News
Blue Vault Partners