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Non-Listed REITs Beginning to Tap Cash Stockpiles to Make Deals

Stepped Up Transaction Activity in 2010 Includes the Largest CRE Acquisition in Nearly Two Years
July 7, 2010
Publicly traded real estate investment trusts, with their strict disclosure and transparency requirements and daily share price rollercoaster ride, tend to get the lion’s share of investors’ and analysts’ attention in today’s market. Like other real estate funds, however, non-traded publicly registered REITs have quietly accumulated billions in capital from investors over the last two years.

The fundraising pace has accelerated in 2010. More significantly, the non-traded players are starting to put their capital to work, with a Denver company recently executing the largest commercial real estate investment transaction recorded by CoStar Group in nearly two years.

Dividend Capital Total Realty Trust, a Denver-based non-traded company, in late June completed the purchase of 32 properties from iStar Financial for an aggregate $1.35 billion before closing costs, the largest investment sale since August 2008.

While apples-to-apples comparisons are challenging because there’s little established research on the non-listed sector, a survey of investment fund data tracked by CoStar shows that non-traded REITs have raised or expect to raise up to $11.1 billion in 2010. A recent report by Atlanta-based Blue Vault Partners LLC found that non-listed REITs are on track to raise $7 billion this year, a 17% increase over 2009.

"The non-traded space has become attractive to traditional institutional investors from a capital-raising standpoint over the last couple of years because it has been able to generate a great deal of capital on a fairly regular basis -- and raise it through distribution means that larger institutional investors never targeted previously,” said Josh Scoville, CoStar’s director of U.S. equity research.

The Dividend Capital/iStar transaction, which traded at an 8% capitalization rate, speaks to the fact that the non-traded sector is “raising money hand over fist” and those funds now must deploy that capital. Once capital is raised, companies must begin paying dividend yields, Scoville noted.

Funds raised by the non-listed firms this year augment some $3.6 billion in existing cash reserves that will eventually be used to purchase office, apartment, retail, hotel, industrial and other commercial assets, according to Vee Kimbrell, managing partner at Blue Vault, which recently published its First Quarter 2010 Nontraded REIT Industry Review. The report tracks key performance metrics and trends among 49 non-traded REITs.

CoStar data shows that publicly traded firms, pension funds and private equity firms still dominate most large transactions. But activity by non-traded firms is increasing, including the following large deals so far this year tracked by CoStar COMPs:

  • Non-traded REIT Inland American Real Estate Trust, Inc. acquired a 16-shopping center portfolio of properties in Georgia, Virginia, Florida and North Carolina in April from publicly traded Developers Diversified Realty (NYSE: DDR) for $424.3 million.

  • Wells REIT II, Inc. bought the 332,000-square-foot Energy Center I office building in Houston for $94 million.

  • Wells REIT II bought the Littleton Corporate Center, two office buildings totaling 493,904 square feet from Angelo, Gordon & Co. for just under $88.5 million.


Like their publicly traded brethren, non-traded trusts register their stock offerings with the U.S. Securities and Exchange Commission. But their shares are not traded daily in the equities market. That makes them less subject to stock market volatility, but also limits their liquidity.

More companies have entered the space this year, with six new non-traded REITs totaling more than $12 billion in common stock registrations becoming effective year to date, according to Blue Vault managing partner Stacy Chitty.

Of the 49 non-traded REITs tracked by Blue Vault, 32 are actively raising capital from individual investors while 17 are closed to new investments. Assets for the 69 non-listed REITs tracked by BMO Capital Markets, meanwhile, totaled nearly $65.8 billion at the end of the first quarter.

Maintaining a stable dividend has traditionally been an important investment draw for investors in non-listed REITs. However, the combination of falling rents, rising vacancies and lower net operating income has stepped up pressure on companies to cut or eliminate dividends in order to conserve capital and repair their balance sheets. About 60% of the top publicly traded REITs have cut dividends in the last two years, compared with 33% of non-listed REITs reporting a meaningful level of assets, according to Paul Adornato of BMO Capital Markets Corp.

“The non-traded world is a half step behind the publicly traded world in many ways,” said Adornato, one of the few analysts following the traded REIT universe to actively track the non-traded sector.

“The old ‘reason for being’ for the non-listed REITs was to avoid having a lot of volatility for their shareholders, (many of whom were) were retirees and others who didn’t want to have sticker shock when they opened their monthly statements,” Adornato tells CoStar.

Like all real estate operating companies, non-listed REITs have had to deal with unprecedented volatility in capital markets, property markets and the macro economy, Adornato said in a June 30 report co-authored by several BMO colleagues titled “Non-Listed REIT Evolution: An Outsider’s View.”

The non-listed industry has responded, to varying degrees, in ways similar to their publicly traded counterparts, according to the report.

Adornato said the non-listed trusts are making more effort to match the disclosure requirements and daily net-asset value (NAV) pricing and fundamentals of the publicly traded group. Once some companies make the change, “every [non-listed] player will want to mark their real estate to market on a real time basis," he said.

In total assets, Adornato estimates non-listed REITs are roughly 10% the size of the publicly traded group.

“My audience of institutional investors only has a passing interest in non-listed REITs should they become public, or make big transactions,” he said, adding that the vast majority of his attention as an analyst remains on publicly traded vehicles.

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