April 5, 2012

How do Non Traded REITs compare?

As you can imagine, REITfyi spends a lot of time doing research and comparing results of Non-Traded REITs with other investments. We believe in the value that they can create but we also recognize that many investors have been affected by Non-Traded REITs that have suffered from sub-par performance. Investors have lost value on their original equity and the market points to fees, lack of liquidity and lack of transparency as the culprits. We are not here to endorse a specific REIT, high fees, or a lack of transparency in reporting. However, we do endorse the industry as a way to invest in commercial real estate that compares somewhat to investing on your own.

No doubt that the Non-Traded REIT industry needs to improve in certain areas. This can be said for many businesses. However, today we want to comment on fees. We are here to say that we would reduce our fees in Non-Traded REITs provided that FINRA and our own Broker Dealer approved. The issue, unfortunately, comes down to the possibility that we are giving investors an incentive outside of the intrinsic value of the REIT.  It’s confusing, but we’re digging into the issue and hope we can offer our investors a structure that allows us to spread fees over a longer term with a lower fee up front. Everyone wins because the advisor can earn a longer term income stream and thus take a longer term perspective with the client.  We’ll dig into this issue further in future posts.

Relative to transparency, we submit that the research and coverage of Non-Traded REITs is better than it has ever been before. There are now research firms dedicated to this space that gather information regularly from publicly filed 10-Q’s and 10-K’s every religiously and then share that information with advisors. We subscribe to this research from two different sources and characterize it as required reading for every advisor. Be sure to ask your advisor what research they are using in their own review of the Non-Traded REIT they are recommending.

Some Non-Traded REITs have had significant hits to their value over the past few years. The management of these REITs point to the decline in the economy while the media points to fees and transparency as the issue.  We believe that the issues faced by Non-Traded REITs are similar to those faced by all of the investors in commercial real estate during the last cycle. Take a moment and do an internet search on Cal PERS  (the California Public Retirement System) real estate investing performance during the last cycle. Or search, ‘Morgan Stanley gives back San Francisco Buildings‘. These are the best and brightest in commercial real estate and the stories of losses from the last cycle are wide spread. Those dollars were lost out of the pension funds and retirement accounts of millions of American workers.  Certainly the management of those companies can also be held accountable, but the fact of the matter is that no matter what is going on in the economy, private clients, companies and retirement systems are investing. There is always risk and more often than not, the returns are positive.

Both Non-Traded REITs and the big institutions have been buying over the past three years. While the industry scrutiny is good and we encourage positive reform, we also wonder what the returns will look like for those Non-Traded REITs that bought aggressively during the last cycle.




Categories: REIT Thoughts