Friday, June 5, 2015

Nicolas Schorsch and American Realty Capital Lay Another Egg

GNL: American Realty Capital Lays Another Egg

On Tuesday, non-traded REIT American Realty Capital Global Trust Inc. - rechristened Global Net Lease, Inc. - began trading on the NYSE under the ticker GNL. GNL is at least the 42nd non-traded REIT to have listed, or merged into or been acquired by another REIT since 1997 and adds to the mounting wealth toll non-traded REITs have extracted from unsophisticated investors.

My co-authors and I have determined that the non-traded REIT industry has transferred at least $45.5 billion in wealth from investors to sponsors and the brokerage industry. The first 41 non-traded REITs had cost investors $25.5 billion in lost wealth and 40 additional non-traded REITs which had updated their NAVs had cost investors another $20 billion in lost wealth. (We will soon be updating this analysis with several additional non-traded REITs that have had liquidity events or updated NAVS.)

GNL Listing Illustrates Extraordinary Harm Done by Non-traded REITs

Global Net Lease raised $1.78 billion between October 1, 2012 and March 31, 2015 – most of it in the first six months of 2014. As of March 31, 2015 there were 179.6 million shares outstanding so investors paid, on average, $9.91 per share for GNL shares.

At the close of the first day of trading Tuesday, GNL shares were worth $9.32, giving investors a total value of $1.674 billion. Including the $114.7 million in distributions GNL had paid by March 31, 2015, investors received approximately $1.79 billion from their $1.78 billion investment. This is a gain of only $10 million, or 0.56%, over three years.

If instead of being sold GNL investors had put their $9.91 into Vanguard’s REIT Index fund (VGSIX) in the first six months of 2014 and took out the same amounts as GNL distributed, the VGSIX investment would have between worth $1.918 billion at Tuesday’s close. Investors in GNL are thus $244 million worse off than they would have been if they had been recommended liquid, diversified, low-cost REITs instead of the illiquid, undiversified, high-cost American Realty Capital Global Trust Inc. Figure 1 presents the value disparity graphically.

Figure 1. Total value of GNL investment vs same investment in VGSIX index fund

Non-Traded REITs Continue to Destroy Shareholder Wealth After Listing

The harm investors suffer from this newly listed REIT is unlikely to end Tuesday. Yesterday after three days of trading, GNL closed at $9.06. Investors who didn’t sell on June 2 lost $47 million over the next two days and now have lost on average $37 million as a result of investing in this non-traded REIT.

Concurrent with the NYSE listing, GNL entered into a new long-term contract with its Advisor (controlled by American Realty Capital executives). The new contract increases the Advisor’s conflicts of interest, and makes it harder for the REIT to fire the Advisor.

GNL’s move to strengthen its ties with its affiliated Advisor is contrary to most non-traded REITs. Normally, non-traded REITs internalize the advisory function at the time of a listing, thus severing relations with the Sponsor and slashing inflated expenses which had been paid to entities controlled by the Sponsor. Interestingly, New York REIT (NYSE: NYRT), another REIT recently listed by American Realty Capital, also chose to maintain its relationship with a conflicted Advisor rather than internalizing the advisory function. Since its listing on April 15, 2014, New York REIT has underperformed a comparably Manhattan-focused REIT by 30%, suggesting that failing to break ties with the Sponsor may cause poor future performance (see Figure 2). If so, the worst may be yet to come for GNL.

Figure 2. $100 investment in NYR and SLG: April 15, 2014 - June 3, 2014


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