By Tim Dulaney, PhD, FRM and Tim Husson, PhD
Shares of non-traded real estate investment trusts (REITs) were sold in large amounts during the real estate bubble of 2005-2007. Without an observable trading price, sponsors simply fixed the share price of non-traded REITs at $10 per share. As real estate markets have collapsed and now begun to recover, it has been difficult to ascertain just how much those $10 shares have changed in value. Non-traded REIT sponsors are now required to estimate per-share net asset values, which have indicated that several of them may face significant capital losses. However, such values are management estimates, and may not reflect market value.
A few non-traded REITs have merged with traded REITs, allowing investors to sell shares of the combined company. They often reverse-split their shares to make their per share prices higher, but in split adjusted terms, those IPOs sometimes reflect significant losses. Some, such as Chamber Street Properties (CSG) and Cole Real Estate Investments Inc. (COLE) have listed their shares directly.
Just last week, Columbia Property Trust (formerly known as Wells REIT II) listed its shares under the ticker CXP. After adjusting for a 4-for-1 reverse split, the per share value of CXP was just $7.33, a loss of over 25%. Compare this to the FTSE NAREIT Index of traded REITs, which has increased 28.4% since Wells REIT II started fundraising in December 2003 and 38.6% since June 2010, the last time shares were sold at $10. It raised approximately $5.9 billion in equity over that period.
Columbia Property Trust was the second largest non-traded REIT by total assets, but by no means alone in facing potential losses. Limited secondary market data suggests that some non-traded REITs have lost upwards of 60-70% on a per share basis. This may come as little surprise, as non-traded REITs are generally laden with upfront and ongoing fees which can erode investor value. We have noted these and other issues in our research paper on non-traded REITs.
These results may be particularly informative in light of the expansion of non-traded investments, including non-traded BDCs, non-traded investment companies, and the resurgence of non-traded REIT fundraising. For our money, it is not at all clear what possible benefit the non-traded format could have over liquid, transparent, and low cost alternatives such as traded BDCs, traded REITs, mutual funds, and ETFs.
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