Non-Traded REITS: Now and in the Future

By David B. Armstrong, CFA | Mar 09, 2011 | Weekly Market Commentary

After reading the latest copy of Blue Vault and participating in a few conference calls last week, I have found that the information I learned at the Public Non Traded REIT convention in December was confirmed: over 80% of Effective Public Non Traded REITS (NTRs) are not covering their dividends.  While I don’t believe this alone is a reason to shy away from seriously considering this asset class, it is a fact that I feel everyone should understand if considering NTRs as an alternative investment.

NTRs offer certain benefits.  For instance, the typical lack of correlation between them and most market indices is attractive for many investors as well as advisors.  There is also a significant difference between NTRs and their brethren, publicly traded REITs.  The main difference is the relatively stable share price of NTRs compared to that of publicly traded REITs.  NTRs change after the issue has closed and the properties have been appraised by an unaffiliated party.  This must be done within 18 months of closing the offering, and then annually thereafter.  Conversely, publicly traded REITs trade on the exchanges and have proven to trade within a wide range of their Net Asset Values (NAV).  In extreme market swings, I have seen publicly traded REITs trade as low as at a 40% discount to NAV as well as a 30% premium.  Currently, publicly traded REITS are trading at about a 15% premium.[1]   Another difference is the significant spread between the dividend yields of NTRs and publicly traded REITs.  The average dividend yield of a public REIT last year was 3.8%, whereas the average dividend yield of NTRs was 6.5%. [2] Compare that to the dividend yield of the S&P 500, currently about 1.9% and you can see why the level of interest in NTRs is on the rise.

To see an example of the increase in popularity of NTRs, one only needs to look back over the last year.  Between 2009 and 2010, the amount of funding for NTRs grew from 6.1 billion to 8.0 billion—a 31% increase.  Compare that to 706 million dollars raised in 2000 and I think it’s fair to say that the last ten years were not really the “lost decade” for the NTR industry.  This is not to say it did not suffer in the last downturn of the economy, but I think it safe to say the industry is not going away. [3]

In looking ahead to the next five years, many are predicting that NTRs could grow to have over 350 billion invested in them over the next 5 years. [4]

Investing in Real Estate Investment Trusts (REITS) involves special risks such as potential illiquidity and may not be suitable for all investors.  There is no assurance that the investment objectives of this program will be attained.

[1-4]Stanger as of Dec2010

Source Data : SEC filings and other publicly available  information

 

 

 

 

 

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David B. Armstrong, CFA

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Dave got into the industry when he discovered his passion for finance in his mid-20’s. He’s a combat veteran and served as an officer in the United States Marines Corps on both active duty and in the reserves, retiring at the rank of Lieutenant Colonel. While serving on active duty, Dave was unable to spend money on deployments, so he became a self-taught investor. Along with a few bucks cash as a bouncer, his investing performance grew to be good....

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