Further on the Returns to Non-Traded REITs
Further on the Returns to Non-traded REITs, updates our 2015 paper including 51 additional nontraded REITs that came into existence after May 1, 2015 and either had had a liquidity event or updated their NAVs between May 1, 2015 and December 31, 2019. We documented that returns to nontraded REITs continue to fall substantially short of the returns to traded REITs. For all 140 nontraded REITs, the shortfall relative to traded REITs was at least $59.2 billion. This systematic underperformance was observed for the additional nontraded REITs launched since May 1, 2015 as well as for the nontraded REITs in existence on May 1, 2015. We also documented nontraded REITs' returns were lower than traded REIT returns for capital raised by nontraded REITs in every calendar quarter.
Craig McCann's NASAA 2015 Presentation, Investments Through Time
Investments Through Time: The Evolution of Investment Products and How They are Sold.
Fiduciary Duties and Non-traded REITs
Published in the Investments & Wealth Monitor, July/August 2015.
A summary of SLCG's analysis of investor returns in 81 non-traded REITs. Investors are at least $45.5 billion worse off as a result of investing in the 81 non-traded REITs compared to investing in a diversified portfolio of traded REITs. Investors in non-traded REITs over the past 25 years would have earned as much or more investing in short and intermediate term US Treasury securities without bearing the risks and illiquidity of non-traded REITs. More than half of the non-traded REITs' $45.5 billion underperformance results from upfront fees charged to investors in the offerings. The rest of the underperformance results from conflicts of interest which permeate the organization structure of non-traded REITs and which are largely absent in traded REITs.
Non-traded REITs are so inferior to traded REITs that no advisor taking due care could develop a reasonable basis for recommending a non-traded REIT. Advisors recommending non-traded REITs either are not exercising due care or are succumbing to the corrupting influence of the extraordinary commissions sponsors pay for recommending non-traded REITs. The brokerage industry is well aware that recommending non-traded REITs is inconsistent with fiduciary duties.
An Empirical Analysis of Non-Traded REITs
Published in the Journal of Wealth Management, 19(1):83-94, Summer 2016.
We find that returns to 81 non-traded REITs which had listed, been acquired by or merged with a listed REIT or had updated per share values average 6.3% annually compared to 11.6% returns earned over the same period in traded REITs. A significant portion of non-traded REITs' $45 billion underperformance results from high up?front fees that average 13.2%, and largely compensate brokers. The remainder of the shortfall results from conflicts of interest that permeate the organizational structure of non-traded REITs.
Non-traded REITs that list on a major securities exchange almost always "internalize" their management and administrative functions prior to listing. We observe corresponding reductions in expenses, on average equal to 9.0% of revenues, largely attributable to the elimination of payments to affiliated parties. Institutional ownership of non-traded REITs rarely occurs until after both an exchange listing and the severing of management and advisory functions from the sponsor, consistent with our view that non-traded REIT investors suffer from the lack of monitoring and effective mechanisms for shareholder protection.
Private Placement Real Estate Valuation
Published in the Journal of Business Valuation and Economic Loss Analysis Volume 9, Issue 1, January 2014.
As a result of the Securities and Exchange Commission's relaxation of its prohibition against the marketing of private placements, investors will soon be exposed to a broad array of syndicated commercial real estate investments. Private placement commercial real estate investments are illiquid and so cannot be easily valued by reference to frequent transactions in the same asset in active markets.
We have reviewed over 200 syndicated commercial real estate private placement memorandums and find that virtually all include projected cash flows. This study explains how investors and their advisors can use these projections to develop estimates of investment value. We determine a lower bound for discount rates applicable to the cash flows derived from commercial real estate and apply the methodology to an actual commercial real estate private placement investment. Our findings suggest significant overvaluation by commercial real estate private placement investment sponsors even when using conservative estimates of discount rates.
A Primer on Non-Traded REITs and other Alternative Real Estate Investments
Published in the Alternative Investment Analyst Review, 2014.
In this paper we provide a brief overview of the ways to achieve real estate exposure and focus our analysis on alternative real estate investments. The term alternative real estate investment, as used in this paper, refers to real estate securities such as non-traded Real Estate Investment Trusts (REITs), private REITs, and Tenants-in-Common (TICs), which are often sold to but may be unsuitable for most retail investors. Some common problems of alternative real estate investments are: 1) their illiquid nature allows them to give investors an illusory sense of low price volatility, 2) their high fees and significant conflicts of interests may lead to a loss of shareholder value, and 3) their reliance on leverage to fund current dividend payments may hide their inability to pay future dividends. Limitations on publicly-available data oblige us to concentrate much of our discussion on non-traded REITs. Our analysis is relevant for the even less transparent private placement REIT and TIC market.