Tuesday, July 29, 2014

Gibberish With A Dash Of Wisdom

This InvestmentNews article from yesterday has me scratching my head.  It's an opinion piece, loose on facts.  The article is written by the manager of the Resource Real Estate Diversified Income Fund (RREDX), an interval fund that invests a portion of its assets in non-traded REITs.   I am going to address a few points from the article.

This sentence early in the article is an understatement:
The best type of liquidity event is when nontraded REIT investors tend to make a profit on their initial investment.
 Duh.  I'm not sure what I can add to this bit of brilliance.

This specious passage troubled me:
Most liquidations happened in one of three ways:
1) An IPO into the REIT public market
2) A sale to an affiliated publicly traded REIT
3) A sale to a REIT sponsor that is a publicly listed company
Very few non-traded REIT liquidity events involve an Initial Public Offering.  An IPO as part of a listing has a stigma attached to it and indicates a REIT is in financial difficulty.  Does anyone remember Inland Western, now Retail Properties of America's (RPAI) IPO and listing?  An IPO involves raising new equity capital - that is the IPO part - and the few non-traded REITs with IPOs attached have locked up existing shareholders.  This happened with the former Wells Timberland (now Catchmark Timber Trust (CTT)) and BlueRock Residential Growth (BRG). 

A listing of shares not involving an IPO is a more common liquidity event.  Examples include American Realty Capital Trust, American Realty Capital Healthcare Trust (HCT), American Realty New York REIT (NYRT), United Development Funding IV (UDF), Cole Credit Property Trust III (listed as Cole Real Estate Investments)), Wells REIT II (Columbia Property Trust (CXP)), and CB Richard Ellis (Chambers Street (CSG)). 

The second point, the sale of a non-traded REIT to an affiliate requires a listed affiliate, which only applies to a few sponsors.  American Realty Capital, through listed American Realty Capital Properties (ARCP), and WP Carey (WPC) have used this method.  NorthStar Realty Finance (NRF) has the potential to use this strategy, but it has not to date.  Inland has several listed REITs but has not used these traded companies to buy or merge with any other Inland non-traded REIT.

The third point, sale of a non-traded REIT to a listed REIT sponsor, is even more tenuous.  The only example that I can think of is ARCP buying Cole Real Estate Investments last fall.  If the rumored NRF acquisition of Griffin-American Healthcare REIT II ever happens, that would be the second example.  A non-sponsor listed REIT buying a non-traded REIT is more common.  Kite Realty (KRG) purchased Inland Diversified earlier this year and Spirit Realty (SRC) acquired Cole Credit Property Trust II in 2013.  Both acquisitions were positive for the buyers.  Inland sold its second REIT to Developers Diversified (DDR) back in the mid-2000s.  There have been several post-listing acquisitions for former non-traded REITs, too, with Realty Income (O) acquiring American Realty Capital Trust after it listed, and now American Realty Capital Healthcare Trust (HCT) is being acquired by Ventas (VTR). 

If you look at the logic behind point three, it becomes a mute point.  Buying a competitor's non-traded REIT makes that competitor look good by giving it an instant track record and liquidity.  It makes no sense for a sponsor to give this advantage to competitor.  Plus, sponsors make big money during the capital raise and investing period, not so much from managing invested assets.  From a sponsor perspective, it's a poor business decision to buy a fully invested company after this one-time, money making opportunity is gone.

I am sick and tired of the fear-mongering trope about rising interest rates.  This article speaks as if rates have already gone up and stocks have tanked.   The article states:
We have also seen a decrease in the valuation of many of the net lease publicly traded REITs, the asset type that represents approximately two-thirds of the nontraded REIT market, due to concerns about higher interest rates.
Whether or not this is an opinion piece, the statement is wrong.  Check the stock charts of O, SRC, WPC and ARCP.  With the exception of ARCP, all are at, or not far from, 52-week highs, and ARCP is trading strong.  Yields on the ten-year Treasury are below 2.50%, and are down about 50 basis points from the start of the year.  Yes, some day interest rates are going to increase, but it has not happened yet.    

I'll finish on a positive note.  The following statement alone is worth reading the article:
Instead, investors should be prepared to stay in non-traded REIT programs longer and focus on the attractiveness of the investment, rather than an early exit.
Non-traded REITs are long-term investments, not short-term flip vehicles.  Recent liquidity events have been positive for investors, sponsors, and brokers.  I hope it continues.  But any investor in a non-traded REIT should be prepared to hold their investment for the maximum time stated in the offering prospectus, if not longer.

1 comment:

Anonymous said...

Cole listed prior to being sold to ARCP.