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Non-Listed REIT 101

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REITs are companies that invest in real estate, typically apartments, retail properties, offices, or industrial properties. Some REITs invest in other types of properties, such as healthcare, student housing, self-storage or single family residential properties. A REIT is required by tax law to distribute most of its income to its shareholders, so REITs are generally viewed primarily as income-oriented investments with potential for growth if property values increase.

Many REITs are listed on securities exchanges, but non-traded REITs are not. They are less liquid than traded REITs, offering their shareholders limited liquidity in other ways. The rationale for investing in a non-traded REIT rather than a traded REIT is that the value of a non-traded REIT more closely tracks the value of the real estate it owns, while the value of a traded REIT is also influenced by general stock market conditions and volatility.

“Lifecycle” non-traded REITs are those that have a finite offering period and expect to have a limited lifespan, often seven to 10 years, after which they intend to liquidate their portfolios and distribute the proceeds to shareholders or list their shares on an exchange. The liquidity strategy and horizon for lifecycle REITs is not binding, and their boards may delay a liquidity event or change the liquidity strategy based upon market conditions. Lifecycle REITs typically do not provide a current valuation of their shares and may only provide a valuation annually after their offerings are completed.

“Perpetual-life” non-traded REITs, sometimes referred to as “NAV” REITs, offer shareholders limited liquidity through repurchase offers at designated intervals, such as monthly or quarterly. These repurchase offers are discretionary, not mandatory, and may be suspended by the board at any time. Repurchases are made at or based upon net asset value, or NAV, and are subject to limits, such as a maximum of 5% of the REIT's total NAV per quarter. If shareholders request an amount greater than the limit for a particular period, repurchases are pro-rated, meaning shareholders will only have a portion of their requests honored and will have to wait until future periods to have the remainder of their shares repurchased. Perpetual-life REITs regularly value their shares, often with the assistance of third-party valuation experts. They have become much more common and widely accepted than lifecycle REITs in recent years.

Factors to consider in evaluating a non-traded REIT include the following:

  • Liquidity: Is a lifecycle or perpetual-life liquidity strategy more in line with an investor’s objectives? If the REIT is perpetual-life, has it honored all repurchase requests to date or has there been pro-rating?

  • Investment Strategy and Portfolio: Different property types have different investment characteristics; for example, hotels are generally considered cyclical, apartments have been more stable and are benefitting from longer term demographic trends, and industrial has been benefitting from online shopping trends. Also, “value add” or “opportunistic” strategies may generate less current income but greater growth potential, while investing in “stabilized” properties may generate more current income but less future growth. Portfolio diversification by location, tenant and/or property type can reduce risk.

  • Performance: How has the REIT performed to date? Performance is generally measured based upon distributions paid and changes in NAV.

  • Distribution Coverage: Have distributions been fully paid from earnings, or has the REIT supported distributions with offering or borrowing proceeds?

  • Leverage: Borrowing at low interest rates can improve a REIT’s overall returns, but debt increases risk, particularly during a market downturn or in an increasing interest rate environment.

  • Fees and Expenses: How do the REIT’s fees and expenses compare with those of its peer group? If they are higher, are they justified, for example, due to a more complex, management-intensive strategy?

  • Manager Quality: Is the manager an institutional real estate manager with a deep organization, or a smaller manager with limited depth and resources? Does the manager have a successful track record investing in real estate?

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