Tuesday, February 11, 2014

More Non-Traded REIT Carnage: Inland Diversified’s Investors Have Lost 40%, Not Gained 31%

By Tim Husson, PhD, Craig McCann, PhD, CFA, and Carmen Taveras, PhD

As we have explained in several blog posts and working papers, non-traded REITs are illiquid, poorly diversified real estate investments that destroy investor’s wealth compared to liquid, diversified real estate investments.

Inland Diversified Real Estate Trust, Inc. ("Inland Diversified") is a non-traded REIT that invests in retail properties, office properties, industrial properties, and multi-family properties. Yesterday, Inland Diversified announced that it was merging with Kite Realty Group ("Kite", KRG), a retail property REIT listed on the New York Stock Exchange.

Inland Diversified's shareholders will receive between 1.65 and 1.707 shares of Kite Realty Group per share of Inland Diversified. Based on the $6.15 closing price for Kite's common shares as of February 7, 2004 and the 1.707 merger ratio, the consideration paid to Inland Diversified stockholders is $10.50 per share. The merger announcement touts that stockholders who invested in September 2009 will have received a 31% return on their investment. This bit of salesmanship doesn’t mention an investment in the Vanguard REIT Index (VGSIX) - a liquid, diversified mutual fund of traded REITs - would have earned 115% over the same period.

The figure below shows the value of $100 invested on September 1, 2009 in the VGSIX index mutual fund. The two red dots represent the $100 invested in Inland Diversified in September 1, 2009 and its current value of $131 based on the merger announcement.*  $100 in the VGSIX index invested on September 1, 2009 with reinvested dividends would be worth $215 on February 7, 2014. Thus, early investors in Inland Diversified now after four and a half years have $131 in value or 40% less than the $215 they would have if they had invested in a liquid, well diversified real estate portfolio instead of the non-traded REIT.

Value of $100 invested in Inland Diversified and Vanguard’s Traded REIT Fund from September 1, 2009 until February 7, 2014


If Inland Diversified’s capital raised from August 2009 until today had been invested in the Vanguard REIT mutual fund, shareholders would have about $1.4 billion today rather than the $1.2 billion Inland Diversified market value implied by the merger announcement. The $173 million difference in value between Inland Diversified and the traded-REIT mutual fund is investors’ aggregate wealth destroyed by Inland Diversified.

Investors’ Net Investments in Inland Diversified Applied to Vanguard’s Traded REIT Fund


*  The 31% total return reported by the REIT appears to not include re-investment returns on dividends.  Reinvesting the dividends would increase the $131 value slightly.

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