Non-traded REITs vs. publicly traded REITs

[haha]

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Originally Posted by REITWrecks They say the shares are worth $10, but if you can't get your money back until someone else says so, how could they be worth anything at all? Trust me, if your shares were worth $20, these guys would be tripping all over themselves to buy them back at $10. There is a great post on this issue in the Non-Traded REIT Forum. Broker/dealers and non-traded REIT sponsors will all go to great lengths to keep feeding $10 opium to stuporific investors. I would avoid these things at all costs.

I read the linked article. Very clear, and I might add, how could it be otherwise?

Here is my post from earlier in this thread which IMHO also pretty well nails the issues with these:

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Originally Posted by haha The whole idea that because something is non-traded it is more valuable is either lunacy or an aid to robbery. I can see why a FA would like it. Big fees, and no way to know how well things are progressing. By the time the investor knows something is wrong, it is likely too late. Investment real estate is bought either by wealthy individuals and partnerships or various institutions including REITs. They are all fishing in the same pond. Given similar skill levels, their returns will be similar, except that fees and loads may vary. How could higher fees improve results? The other variable is deal structure- especially amount of leverage. But there is no magic anywhere. Just look a what happened to Blackstone with the Equity Office portfolio they bought from Sam Zell. And liquidity itself is a benefit that would be expected to add to the value of an investment. If people don't like to know how their investments are doing (except when they suspect that they are doing well) they can just join this forum and and distract themselves with shareing pictures of their feet. Ha

[harley]

Yeah, thanks for rubbing it in.

[clifp]

I'm with HaHa liquidity is good period. The Angel investment club that Nords and I are members of, is run by a sharp (perhaps too sharp) former Harvard Biz school professor. During the last 18 months he has been pushing that the investment in small companies (generally Hawaii based and High Tech) are doing better than stock market , cause they are still in business and haven't "dropped in value". This struck me as crazy since the value of equities has dropped across the board and among the hardest hit were microcap companies. Just because there isn't stock quote for startup tech company, or REIT doesn't mean they are unaffected by the events around them.

For REITs I'm sticking with solid companies like Realty Income O

[old guy]

I'm a new guy and I found this site by googling "non-traded REIT's. I'm a long term investor off and on of traded REIT's and have done very well with them over the past 12 years. I am also a fan of Lucia's buckets of money strategy but I have been very sceptical of his touting of non-traded REIT's because of their lack of transparently. The reason for my thread here is to give my perspective on traded REIT's. I currently own positions in 5 traded REIT's which I started aquiring during the past 12 months. Capital appreciation has been great along with a good dividend. The issues I hold are Duke Realty (DRE), First Potomic (FPO), National Retail (NNN) Realty Income (O) and HCP INC. (HCP). The average annual yeild is about 5.0% for the group and the dividend for all of them is well covered by the AFFO. The yield may be slightly less than that of the Non-traded issues currently out there but the distribution is a return on capital rather than a return of capital and there is the benefit of liquidity. Also, the traded REIT's represent a hard asset and can serve as a hedge against future inflation. I'm not saying "Non-traded" REIT's aren't a good investment but I don't think their blind risk out weights traded REIT's transparently.
Additionally, I might suggest those of you that are income investors should look at Traded REIT preferred shares. Their yield is very good and the dividends are almost always "cumulative". If the common pays a dividend the preferred must pay their dividend. Therefore, the dividend is not qualified and is taxable at regular income rates. You should hold them in a tax advantaged account (IRA, etc.) Anyone interested in further benefits of preferred's let me know and I'll elucidate. A final word, real estate is a powerful addition to your asset allocation. It increases your overall rate of return and reduces your level of risk over time.

[FinancialWiz]

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Originally Posted by Gardnr Ray Lucia regularly touts non-traded REITs as an excellent income investment primarily because they don't have the volatility of traded REITs. These things apparently have big commissions up front and high fees as well, compared to traded REIT funds and ETFs. And they have very little liquidity, tying up your money for many years. Which is fine if you understand that going in, but it is a downside. He says that they're a great comfort in this market while everything else is taking a dive. But I find that to be absurd really because the value is changing but they don't get marked to market like traded REITs. Just because you don't know the current value doesn't mean they haven't fallen in value. It just seems to be an "ignorance is bliss" mindset that really is just self delusional. I could achieve the same thing if I just chose not to look at the current value of my traded REITs, or my stocks/funds for that matter. I enjoy listening to his radio show for the most part but this one thing has really been bothering me. Every time I hear him talk about this I shake my head. Maybe some day I'll call him up and try to put him on the spot about it. Anybody own these or have some different perspective that I'm missing?

Non-traded REITS cannot be evaluated by the same standards as publicly-traded REITS. They are a hybrid between partnerships and PTRs. They are mis-understood by many people without extensive real estate backgrounds. I don't think Ray meant the only advantage of non-traded REITS is the fact that the stock price is stable. Non-traded REITs, btw, do mark to market their values by law within 18 months after they close. Most are 'open' that is - they are accepting new investors for 3-5 years. As I write this message, fees for non-traded REITs are actually lower than publicly traded REITS, as NTRs are trading well over their net asset value - that is - the total number of shares x price is far greater than the market value of their real estate. It is common now (January 2011) for PTRs paying solid dividends to be priced some 40% or so over their NAV. That means the prices of the stock is well above the actual value of the real estate. NTR, however - today have been buying over the last couple years at very low prices and are continuing to buy at low prices. PTR - and all stocks - are priced for the future. PTRs are priced some 18 months in advance. Indeed, todays PTR values are within 10-20% of their all-time highs in 2007. But actual private real estate can be purchased today at a much greater discount than 10-20% of their 2007 value.
It is true that 88 cents or so of every dollar invested goes into the typical NTR - but with real estate being bought at huge discounts with low financing the NTR investor can do very well, indeed. NTRs also have better tax advantages than PTRs as they frequently use accelerated depreciation methods. One popular retail NTR has a 7% dividend entirely covered from immediate taxation. If liquidity is important, PTRs are certainly the way to go - but many NTRs offer solid dividends and excellent growth potential today. But the fact that the price doesn't change until after the REIT closes isn't a big deal. Don't ignore the real advantages of NTRs.

[FinancialWiz]

Quote:

Originally Posted by old guy I'm a new guy and I found this site by googling "non-traded REIT's. I'm a long term investor off and on of traded REIT's and have done very well with them over the past 12 years. I am also a fan of Lucia's buckets of money strategy but I have been very sceptical of his touting of non-traded REIT's because of their lack of transparently. The reason for my thread here is to give my perspective on traded REIT's. I currently own positions in 5 traded REIT's which I started aquiring during the past 12 months. Capital appreciation has been great along with a good dividend. The issues I hold are Duke Realty (DRE), First Potomic (FPO), National Retail (NNN) Realty Income (O) and HCP INC. (HCP). The average annual yeild is about 5.0% for the group and the dividend for all of them is well covered by the AFFO. The yield may be slightly less than that of the Non-traded issues currently out there but the distribution is a return on capital rather than a return of capital and there is the benefit of liquidity. Also, the traded REIT's represent a hard asset and can serve as a hedge against future inflation. I'm not saying "Non-traded" REIT's aren't a good investment but I don't think their blind risk out weights traded REIT's transparently. Additionally, I might suggest those of you that are income investors should look at Traded REIT preferred shares. Their yield is very good and the dividends are almost always "cumulative". If the common pays a dividend the preferred must pay their dividend. Therefore, the dividend is not qualified and is taxable at regular income rates. You should hold them in a tax advantaged account (IRA, etc.) Anyone interested in further benefits of preferred's let me know and I'll elucidate. A final word, real estate is a powerful addition to your asset allocation. It increases your overall rate of return and reduces your level of risk over time.

Congratulations - you have picked some good REITs - but pretty much all REITS have done well the last two years as prices were so depressed. IF you know what you're doing you can find Non-traded REITs with dividends covered by AFFO paying 7%. These dividends are almost completely covered from immediate taxation, making an bigger difference between their publicly traded REIT dividend cousins. Don't pay attention to WreckReits.com - it's an anonymous site (that alone should reduce it's credibility). It distorts facts all the time. It's believed to be sponsored by brokers who are not allowed to offer private placements or non-traded REITs, and they need something to 'combat' the popularity of non-traded REITS. An example is their comparing the dividend of a NTR to a 'ponzai scheme'. That is totally off base. REITs are popular with retirees and others who count on a dividend. When a REIT starts up it is in the 'money raising' phase. It may have cash - but doesn't have enough earnings yet to pay dividends out of earnings. Nobody would invest in such a REIT unless the REIT were paying dividends, so they all start out paying a dividend. Of course the dividend starts out as not covered from AFFO. As the REIT matures - my favorites have covered their dividend from FFO within 6-12 months you have no such issue. Many other misconceptions have come from reit-wrecks.com.

[DebER]

I have shares in Healthcare Trust of America. They are buying mostly medical buildings and thinking of going public (phased-in over 18mos) sometime this year. Does anyone have an opinion of this reit? Thanks.

[FinancialWiz]

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Originally Posted by DebER I have shares in Healthcare Trust of America. They are buying mostly medical buildings and thinking of going public (phased-in over 18mos) sometime this year. Does anyone have an opinion of this reit? Thanks.

This is one of the few Non-traded REITs that is not covering it's dividend (7.2%) from AFFO currently, that I actually like. They have some $200,000,000 in cash and are actively buying health facilities. Their dividend should be fully covered by the end of the year. BTW, they are NOT 'going public' this year. They are scheduled to close to new investors at the end of February - then there will be a good year before they 'go public' - depending on market conditions. During the year they will be building market value, but they do expect to issue publicy traded shares in excess of their non-traded $10 purchase price in 2012.

[MooreBonds]

I invested $5k in a non-public REIT that has a MLP structure a few years ago (forgot the name). Every non-public REIT is different...mine is uninspiring.

It's distributed 5.0% every year, essentially all of it from cash flow (not much return of capital). It was a small diversifier for me, so it's not a huge position.

Some non-public REITS are more steered towards benefiting all shareholders equally - the one I'm in shows that the General Partner puts up (literally) $5,000 in capital for something like 2% of the REVENUE. The numbers aren't exact, but basically the GPs put up a tiny bit for a huge return on their investment, and the rest of the partners receive mediocre returns. Also, they don't always buy properties outright - they buy 37% or 52% or partial stakes in properties...and the yield/price they pay wouldn't qualify as a 'steal' in my books, given the daily e-mails I receive from CB Richard Ellis commercial real estate offerings in various parts of the country.

[kumquat]

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Originally Posted by FinancialWiz Don't pay attention to WreckReits.com - it's an anonymous site (that alone should reduce it's credibility).

Possibly, perhaps, just maybe, this site shares that distinction?

[FinancialWiz]

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Originally Posted by Free To Canoe Well said. I share the the general negative opinion about non-traded REITs. In Pioneering Portfolio Management: A Fundamental Approach to Personal Investment by David F. Swensen, he goes into detail on the concerns of private (therefore non-traded) REITs. He gives one good example, TIAA CREF REIT and one horror story to make his point. Many of his points are itereated in the above posts. Free to Canoe

Swensen was talking about PRIVATE REITS - they are only available to acredited investors - basically those worth $1,000,000+. Private placements have a lot of risks. He lists Wells as an example of a horrible investment. But most non-traded REITS are NOT private - they are public, but non-traded. Most have less risk and lower fees than in private REITS. Remember that non-traded reit is more like an investment in actual real estate as opposed to a security. They have up-front fees as does actual real estate - and they are not liquid - and neither is real estate. But in today's market non-traded reits can buy at great discounts and could provide very secure income. Publicly traded REITS are pretty much all selling for more than the underlying value of their real estate (NAV) today. Realty Income (O on NYSE) sells for over 30% premium to it's net asset value. Kind of like a 30% load if some ways. But some public but non-traded REITs have been buying at well under today's NAV prices. Anyway, don't confuse private reits with public, not-traded reits.

[FinancialWiz]

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Originally Posted by kumquat Possibly, perhaps, just maybe, this site shares that distinction?

Not really - you can read up on the creators of this site. The ReitWrecks.com site is totally anonymous and the sponsors write inaccurate information about non-traded reits all over the site. It's sole purpose is to discredit non-traded reits. This site is totally different - you don't have to people running this site spreading lies.

[veremchuka]

RUN!

I was approached with NTR when I 1st retired and it sounded like something I did not want to touch. The money is locked up and hard to get back unless you want to take a loss trying to sell it to .... who? It sounded like you had to stay in it for several years and it was not clear how I exactly do get my money back. I took a bath in a limited partnership in the mid 80's and I smelled a rat re NTR. Plus a lot of the income is your principal so that sounded kinda fishy. Huge commissions, why do you think these so called advisers push them?

There's a lot to be said for liquidity, I can invest in the Vanguard REIT fund and know what it is worth and can get out anytime I want.

[FinancialWiz]

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Originally Posted by veremchuka RUN! I was approached with NTR when I 1st retired and it sounded like something I did not want to touch. The money is locked up and hard to get back unless you want to take a loss trying to sell it to .... who? It sounded like you had to stay in it for several years and it was not clear how I exactly do get my money back. I took a bath in a limited partnership in the mid 80's and I smelled a rat re NTR. Plus a lot of the income is your principal so that sounded kinda fishy. Huge commissions, why do you think these so called advisers push them? There's a lot to be said for liquidity, I can invest in the Vanguard REIT fund and know what it is worth and can get out anytime I want.

You know what the Vanguard stock is worth but you don't know what the actual value of their underlying real estate is!! Unless you subscribe to Green Street or another service, which is very expensive. It is true you don't have liquidity in anything non-traded - and if you need liquidity then you should not invest in anything non-traded. But those with net worths above $250,000 or so usually do not need all their money to be liquid. Some non-traded REITS that are about to close to new investors will have rather short life-cycles. Take American Realty Capital for example. They have a very solid portfolio and will close soon. They'll be scooped up by a public REIT probably within a year I predict. So your 7% income and any appreciation and principal should be returned to you in about a year if you invest today. Find a broker and investigate this REIT - it's a good way to get your feet wet with these investments, as the portfolio is almost complete and the dividend is totally covered by MFFO - so there is bound to be appreciation. I expect it to sell from $11 to $13 per share around a year from now when it goes public or gets bought out.

[davephx]

I agree that NTR's are more like actually buying real estate and taking advantage of depressed property values in those that are buying today vs the whims of the market which may overpay vs actual value (a very high spread).

4 important factors:

1) Big issue of course is in my view fraudulently enhancing perceived current returns by returning investors own cash like a ponzi scheme or in the early stages the sponsor loaning money.

Back in the 80's the big public programs did this, one admitted they were holding money in cash reserves to hype the dividend. I was even quoted in Barrons back then discussing it.

Today the most legitimate way to fund initial distributions in a new offering where sitting on lots of cash at almost zero return while making good deals is for the sponsor to INVEST additional funds (not a loan, not a preferred position but with investors) to cover the short term lack of funds from operations. This is the sponsors money that is used not investors. Typically its fully covered within say 12 months.

2) Acquisition/Deposition fees - this is one of my big issues. Most sponsors get an acquisition fee of 1% or more on the FULL purchase price of properties not just on equity. It use to be this was not shown in the prospectus in the Sources and Uses table but buried as part of the price of the property. I favor sponsors that take ZERO acquisition fees other than direct out of pocket expense reimbursements.

Same issue on the back end sales. Some sponsors take a fee for selling other do not.

3) Leverage - With strong sponsors with quality properties positive leverage is still beneficial especially buying in today's depressed market. Up to 50% is reasonable in my view (Cap rate greater than interest rate).

Many REITs have had difficulty refinancing their maturing debt (in commercial real estate usually only 5-year terms no 30 years like in homes). For strong sponsors with quality properties refi seems to have loosened up and some sponsors reduced cash distributions to build cash reserves in case could not re finance but some have done so now very successfully.

To see this you want to look at not current programs of a sponsor but older ones and how they managed the mortgage maturity refinancing.

With 50% leverage you have twice the value of real estate working for you so the front end syndication costs are about half the actual equity amount based on value of property that your buying vs all cash deals.

4)I want a sponsor that went through the 80's commercial real estate crash (when the tax shelter was taken away 1987 I believe and top tax rate was 70%) I want to see if investors lost money or not.

The then S&L's were bailed out by the Resolution Trust Corp, but not investors who lost when so many then RE partnerships' only real economics was the tax shelter not the real estate itself.

Today we don't have these huge tax write offs against high tax rates. Today we have some of the lowest tax rates on the wealthy in U.S. history and far lower than most of the rest of the world.

Overall U.S. taxation is the lowest of the 32 members of OCD and corporate actual tax collections (not top rate few pay) is about average for corporations in developed countries.

While we don't have or need the shelter to offset high tax rates (passive now vs active investments) in non qualified accounts still get some income sheltered by depreciation just not to offset ordinary income.

In qualified plans with some real estate have to be careful on Unrelated Business Taxable Income but rarely a problem unless very large investment in some circumstances.