Friday, September 23, 2011

Valuations

I saw this Investment News article on Tuesday. It is my opinion that the non-traded REIT industry has treated David Lerner and the Apple REITs as a one-off, isolated incident.  This is a misguided, myopic view.  The non-traded REIT industry needs to proactively address their share price valuations, or resign itself to the impact of FINRA and SEC dictates.   The valuation issue impacts the entire industry, and is not isolated to the Apple REITs.  The key passage from the Investment News article is below:
The Finra rule proposal potentially would shorten that time period considerably, said Kevin Hogan, executive director of The Investment Program Association, a trade group for alternative-investment sponsors, including nontraded REITs and the broker-dealers that sell them. Last week, the IPA held a members-only webinar with Finra and Securities and Exchange Commission officials, who discussed the rule proposal.
Finra's proposal will be followed by the customary period of time for broker-dealers and industry sponsors to comment, Mr. Hogan said. But Finra's focus on the length of time nontraded REITs record an estimated valuation is clear, he said.

“Finra will try to have that date to be shorter and more definitive,” Mr. Hogan said.
Nancy Condon, a spokeswoman for Finra, said that she doesn't know when Finra will publish the rule proposal for comment.
It appears that regulators' concern about the valuation of illiquid nontraded REITs stemmed from the valuation of the Apple REITs, which are sold exclusively by David Lerner Associates brokers, Mr. Hogan said.
A large, if not only, part of the non-traded REITs' and broker / dealer community's ostrich valuation strategy is an unwillingness to admit - on client statements - the true impact of the initial load.  All REITs have an immediate valuation that is net of the offering costs (load), giving a REIT that investors paid $10 for a net value of $8.50 to $9.00.  No REIT, whether public or private, traded or non-traded, is buying real estate assets that gives an immediate 18% to 11% appreciation (the amount needed to recover a 15% to 10% initial load).  Even though all the initial fees of non-traded REITs are disclosed, and investors should understand the fees they are paying, registered representatives don't want to deal with investors' questions when sale discussion points become reality on paper, and investors want to know what happened to 10% to 15% of an investment they just purchased. 

If all REITs were required to publish their net valuations, it should have the impact of driving down front-end fees, as brokers are going to want to avoid fee impact conversations.  It will also shorten hold periods as smaller loads are easier to overcome.  Earlier and more frequent valuations will benefit investors, sponsors and brokers.

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