More and more investors in unlisted REITs are awakening to the “Hotel California” effect: They can’t get out of their REIT investment.
According to “The Non-Listed REIT Blog,” a subscription newsletter covering non-listed REITs for due diligence analysts and others, six of the biggest REITs have halted their redemption programs. These six REITS are: Piedmont Office Realty Trust, Inland American Real Estate Trust, Inland Western Retail Real Estate Trust, Wells Real Estate Investment Trust II, Behringer Harvard REIT I and Cole Credit Property Trust II. The same Non-Listed REIT Blog is also reporting that other REITS such as Behringer Harvard Opportunity REIT I, Desert Capital REIT, Dividend Capital Total Realty Trust, Grubb & Ellis Apartment REIT, KBS Real Estate Investment Trust and Whitestone REIT have stopped redeeming or been unable to redeem all the submitted shares.
Accompanying this illiquidity problem, are potential valuation problems. For example, after closing the redemption program, Piedmont/Wells reported a net asset value decline of 15 percent — from $8.38 to $7.40 per share — along with a dividend reduction.
These examples highlight the valuation and liquidity risk issues faced by investors with unlisted REITs. Arguments that private and non-traded REITs perform better than publicly traded REITs is cold comfort if an investor can’t redeem at par or above — or can’t redeem at all because redemptions have been frozen or limited to a small number of investors.
A potential inability to trade and liquidate shares, coupled with a decreased dividend, places unlisted REIT investors in dangerous financial waters. These investors find themselves with essentially illiquid assets with decreasing yields in a deteriorating economic environment. We believe this is an especially troubling situation with respect to REITs that have a concentration of commercial properties purchased around 2006 or 2007 in bubble areas such as Florida or California and/or REITs with weak commercial tenants and/or high leverage and low liquidity.
The value of shares in a publicly traded REIT is more reliable and discernible because these investments are priced daily by way of investors’ purchases and sales in an open market. In contrast, shares of privately traded REITs with little or no market are priced by the same REIT managers and operators who selected properties for inclusion in the REIT portfolio. In essence, they are giving themselves their own report cards.
What is most troubling about this pricing issue for unlisted REITs is that it enables incompetent or unethical financial advisors who heavily promote and sell these products to inappropriately downplay the true risks of these unlisted REITs simply because the prices don’t move daily on an exchange. When this lack of price transparency is coupled with the high commissions that unlisted REITs pay to financial advisors to sell these REITs, the REITs are dramatically oversold to investors looking to avoid the risks of the equities markets, we believe.
In our opinion, investors who believe they were not informed of the true characteristics and risks of unlisted REITS and/or investors who are in or near retirement with significant portions of their investable assets in nonpublic or private REITs should have their portfolios independently evaluated.
Vernon Healy represents investors who have been the victims of negligence or unethical behavior by investment professionals and who have suffered significant investment losses. For more information about Vernon Healy’s efforts on behalf of investors click here.