Articles Posted in Non-Traded REITs

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https://i1.wp.com/www.investorlawyers.net/blog/wp-content/uploads/2018/05/15.10.14-apartment-buildings.jpg?resize=300%2C210&ssl=1Based on publicly available information, including recent SEC filings, shares of Summit Healthcare REIT, Inc. (“Summit” or the “Company”) may have a value of less than $2.00 a shares – far below the initial offering price of $8.00 share and also less than the $2.80 NAV provided by Summit.

Headquartered in Lake Forest, CA, Summit is structured as a Maryland corporation that qualifies as a real estate investment trust (“REIT”) for tax purposes.  Formed in 2004, Summit was formerly known as Cornerstone Core Properties REIT, Inc.  Following a strategic repositioning of the Company’s property portfolio to focus on healthcare real estate and related assets, the name change was formally adopted in October 2013.

On June 21, 2018, a third party known as MacKenzie Realty Capital, Inc. reportedly closed on a tender offer, purchasing some 41,566 shares of Summit at a price of $1.56 per share.  As of December 31, 2017, Summit reported a net asset value (NAV) of $2.80 per share.

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investing in real estate through a limited partnershipRecent pricing on shares of Cole Credit Property Trust V, Inc. (“CCPT V” or, the “Company”) – at reported prices of $17.25-$17.75 – suggests that investors who chose to sell their shares on a limited secondary market may have sustained considerable losses of up to 30% (excluding any distributions received to date).  Formed in December 2012, CCPT V is structured as a Maryland corporation.  As a publicly registered, non-traded real estate investment trust (“REIT”), CCPT V is focused on the business of acquiring and operating “a diversified portfolio of retail and other income-producing commercial properties.”  As of October 31, 2018, the Company’s real estate portfolio consisted of 141 properties across 33 states, with portfolio tenants spanning some 26 industry sectors.

The shares of CCPT V, a publicly registered, non-traded REIT, were offered to retail investors in connection with CCPT V’s initial offering, which was priced at $25 per share.  The Company launched its initial offer in March 2014, and as of the second quarter of 2018, had raised $434 million in investor equity through the issuance of common stock.

Some retail investors may have been steered into an investment in CCPT V by a financial advisor, without first being fully informed of the risks associated with investing in non-traded REITs.  For example, one initial risk that is often overlooked concerns a non-traded REIT’s characteristic structure as a blind pool.  In the case of CCPT V, its blind pool offering means that not only were shares issued to public investors for a REIT lacking any previous operating history, but moreover, CCPT V did not immediately identify any of the properties that it intended to purchase.

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https://i1.wp.com/www.investorlawyers.net/blog/wp-content/uploads/2018/05/15.10.14-apartment-buildings.jpg?resize=300%2C210&ssl=1NorthStar Healthcare Income, Inc. (“NorthStar Healthcare”) is a public, non-traded REIT formed in October 2010 as a Maryland corporation.  NorthStar Healthcare is in the business of acquiring a geographically diverse portfolio of various healthcare real estate assets, including equity and debt investments (including various joint ventures with other non-traded REITs) in the mid-acuity senior housing sector, as well as in memory care, skilled nursing, and independent living facilities.  Pursuant to its initial offering, which closed on February 2, 2015, the non-traded REIT raised gross proceeds of $1.1 billion (subsequently, NorthStar Healthcare conducted a Follow-on Primary offering, raising total gross proceeds of $1.9 billion through March 22, 2017).

As a publicly registered, non-traded REIT, numerous retail investors were solicited by a financial advisor to invest in NorthStar Healthcare.  Unfortunately, customers who purchased shares through the IPO upon the recommendation of a broker may, in some instances, have been uninformed of the complex nature of the investment, including its high upfront commissions and fees (as set forth in its prospectus, NorthStar Healthcare charged investors a selling commission of up to 7% of gross offering proceeds, a dealer-manager fee of up to 3%, and an acquisition fee of 2.25% for properties acquired by the REIT).

Furthermore, as a non-traded REIT, NorthStar Healthcare is illiquid in nature.  Investors seeking liquidity have limited options at their disposal in the event that they wish to exit their investment position in the near term.  Briefly, investors seeking liquidity may: (i) seek to redeem their shares directly with the sponsor (it is worth noting that NorthStar is “not obligated to repurchase shares” under its Share Repurchase Program), or (ii) be presented with limited, market-driven opportunities to tender their shares to a third party professional investment firm (typically at a disadvantageous price), or finally, (iii) seek to sell their shares on a limited secondary market specializing in creating a market for illiquid securities.

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BuildingHeadquartered in Newport Beach, CA, KBS Real Estate Investment Trust II, Inc. (“KBS II”) was formed as a Maryland REIT in July 2007.  Pursuant to its public offering, KBS II offered 280 million shares of common stock, of which 200 million shares were registered in its primary offering, and an additional 80 million common shares were registered under the non-traded REIT’s dividend reinvestment plan.  KBS II’s initial offering closed on December 31, 2010, with 182,681,633 shares sold, thus raising gross offering proceeds of $1.8 billion.

Many KBS II investors may have been steered into this complex investment by a financial advisor or stockbroker.  Unfortunately, KBS II investors may have been uninformed as to the illiquid nature of their investment (as a non-traded REIT, KBS II shares do not trade on a national securities exchange), and now have limited options if they seek liquidity on their investment.

In January 2016, KBS II’s board of directors formed a Special Committee for the purpose of exploring “the availability of strategic alternatives.”  Subsequently, the Special Committee determined that it was in the best interest of KBS II stockholders to market some of the non-traded REIT’s assets, and depending on the scope of the asset sales, “thereafter adopt a plan of liquidation that would involve the sale” of remaining KBS II assets.

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Wastebasket Filled with Crumpled Dollar BillsInvestors in Carter Validus Mission Critical REIT, Inc. (“Carter Validus”) may have arbitration claims to be pursued before FINRA, in the event the investment recommendation was unsuitable, or if the financial advisor’s recommendation was predicated on a misleading sales presentation.  Headquartered in Tampa, FL, Carter Validus is structured as a Maryland real estate investment trust (“REIT”).  As a publicly registered, non-traded REIT, Carter Validus was permitted to sell securities to the investing public at large, including numerous unsophisticated retail investors who bought shares through the IPO upon the recommendation of a broker or financial advisor.

In connection with its IPO, Carter Validus offered up to 150,000,000 shares of common stock at $10 per share.  As set forth in its Registration Statement as filed with the SEC, Carter Validus seeks to acquire “income-producing commercial real estate with a focus on medical facilities, data centers and educational facilities.”  As more fully described below, recent secondary market pricing for Carter Validus shares, at a bid-ask spread of between $3.15 – $3.30 per share, suggests investors who opted to sell their shares through a limited secondary market have sustained a principal loss of approximately 67%, excluding distributions.

Non-traded REITs like Carter Validus pose many risks to investors that are often not readily apparent, or in some instances adequately explained by the financial advisors recommending these complex and esoteric investments.  To begin, one significant risk associated with non-traded REITs has to do with their high up-front fees and commissions, which act as an immediate drag on investment performance.  In connection with its IPO, Carter Validus charged investors a “selling commission” of 7%, in additional to a “dealer manager fee” of 2.75%, and certain “organization and offering expenses” of 1.25%.  Thus, in aggregate, investors who participated in the IPO were charged 11% in commissions and fees from the outset.

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Money Maze
Investors in Black Creek Diversified Property Fund, Inc. (“Black Creek” or the “Company”) may be able to recover losses on their investment through initiating an arbitration proceeding with FINRA Dispute Resolution, if the recommendation to purchase Black Creek was unsuitable, or if the broker or financial advisor who recommended the investment made a misleading sales presentation.   Black Creek changed its name as of September 1, 2017- it was formerly known as Dividend Capital Diversified Property Fund.  As of June 2017, Black Creek owned 51 properties worth an estimated $2.3 billion in 19 geographic markets in the United States.

Black Creek was formed in 2005 and is a NAV-based perpetual life REIT primarily focused on investing in and operating a diverse portfolio of real property. As a NAV-based perpetual life REIT, Black Creek states that it intends to conduct ongoing public primary offerings of its common stock on a perpetual basis. The Company states that it also intends to conduct an ongoing distribution reinvestment plan offering for Black Creek stockholders to reinvest distributions in the REIT’s shares.

Because Black Creek is registered with the SEC, the REIT was permitted to sell securities to the investing public at large, initially offering shares at $10.00 a share.  However, Central Trade & Transfer, a secondary market web site, lists a trading range for Black Greek shares of between $6.95 and $7.05 a share, even though Black Creek lists its estimated net asset value (NAV) per share as $7.49 a share.  Based on either figure, it appears that investors at the initial $10.00 a share offering price have incurred significant principal losses.

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https://i1.wp.com/www.investorlawyers.net/blog/wp-content/uploads/2018/05/15.10.14-apartment-buildings.jpg?resize=300%2C210&ssl=1
As previously reported, American Finance Trust, Inc. (“AFIN” or the “Company”), formerly known as American Realty Capital Trust V, Inc., listed its shares on Nasdaq Global Select Market (“Nasdaq”), under the symbol AFIN effective July 19, 2018.

The former non-traded REIT’s shares are therefore publicly traded, but not all shares are yet saleable. In connection with the listing, the Company’s shares were divided into three classes: Class A, Class B-1 and Class B-2.  American Finance Trust has listed its Class A and former Class B-1 shares on NASDAQ, and the remaining Class B-2 shares are expected to list by January 2019. Shares of the non-traded REIT originally sold for $25.00 each, and the company terminated its share repurchase program at the end of June prior to listing on Nasdaq.

Against this backdrop, a private equity fund known as MacKenzie Realty Capital Inc. has offered to purchase up to 400,000 shares of each class of company common stock. MacKenzie is offering $15.00 per Class A share and $14.01 per Class B-1 share, and will purchase up to 400,000 shares of each class. The offer expires on November 16, 2018.  Of note, these prices are above the current market price of AFIN shares on NASDAQ. Although most investors paid $25.00 a share for AFIN shares in the Company’s offerings, AFIN shares have consistently traded well below that price level since the Nasdaq listing.  AFIN shares have traded as low as $13.15 a share, and closed on October 25, 2018 at $13.85 a share.  The performance of the Company since it started trading on July 19 may have caught some investors by surprise, since AFIN published an “estimated per share” net asset value of $23.56 in June 2018.

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Building DemolishedInvestors in American Finance Trust (“AFIN”) may have arbitration claims to be pursued before FINRA, if their AFIN investment was recommended by a financial advisor who lacked a reasonable basis for the recommendation, or if the nature of the investment was misrepresented by the broker.  AFIN was initially structured as a publicly registered, non-traded real estate investment trust (REIT).  As such, many unsophisticated retail investors participated in the AFIN IPO upon the recommendation of a financial advisor at a price of $25 per share.

In the wake of AFIN’s listing as a publicly-traded stock, AFIN’s stock price has languished at far below the $25 a share price that many investors paid for AFIN stock at the recommendation of stockbrokers or advisors.  As of October 18, 2018, AFIN shares closed at $14.26 a share.

Earlier this year — as we have discussed in several recent blog posts — the board of directors of AFIN announced the approval of a plan to list the REIT’s common stock on the Nasdaq Global Select Market (“NasdaqGS”), under the symbol ‘AFIN’.  In connection with this planned “liquidity event,” AFIN’s board also approved a phased liquidity plan, pursuant to which certain amendments were made to AFIN’s corporate charter:

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Hospitality Investors Trust Inc. (“HIT”, formerly known as ARC Hospitality Trust, Inc.) has announced that it is buying back shares for $9.00 a share, which is a discount of approximately 35% to what it the company claims is the shares’ net asset value (NAV) of $13.87 a share.  It is also a far cry from the $25.00 a share price at which most investors initially acquired shares.

Building Demolished
HIT is a non-traded real estate investment trust (REIT) focused on ownership of hotels and other lodging properties in the United States.  As a publicly registered non-traded REIT, Hospitality Investors Trust was permitted to sell shares to the investing public at large, oftentimes upon the recommendation of a broker or financial advisor.  The REIT sold shares to the public for $25.00/share.  Some investors may not have been properly informed by their financial advisor or broker of the complexities and risks associated with investing in non-traded REITs.

HIT’s board has adopted the share repurchase program, effective October 1, 2018, for shareholders who desire immediate liquidity, and recommends that investors do not sell their shares unless they need immediate liquidity because (according to HIT) the initial repurchase price is well below the current and potential long-term value of the shares.  Shares bought at any time are eligible for repurchase under the program, and the first repurchase date under the to the program is scheduled for December 31, 2018.

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Money Whirlpool
As discussed in a prior blog post, on June 29, 2018, the board of directors of American Finance Trust, Inc. (“AFIN” or the “Company”), formerly known as American Realty Capital Trust V, Inc., announced the approval of a plan to list AFIN common stock on the Nasdaq Global Select Market (“NasdaqGS”), under the symbol ‘AFIN’.  Pursuant to that plan, half of AFIN’s shares — AFIN Class A shares — were recently listed on NasdaqGS.  Specifically, since July 16, 2018, shares of AFIN have been publicly traded and are currently priced around $17.50 per share.  Therefore, investors who participated in the IPO and paid $25 per AFIN share and continue to hold their position have incurred substantial unrealized losses on their investment of approximately 30% (exclusive of commissions, as well as distributions paid, to date).

Most recently, the AFIN board of directors announced that in connection with their public listing, the former non-traded REIT now intends to convert its Class B-1 shares, which represent approximately 25% of AFIN shares outstanding, into Class A shares one week earlier than previously planned, on October 10, 2018.  At this time, Class B-2 shares are still scheduled to convert to AFIN Class A shares on January 15, 2019, as previously planned.

AFIN shareholders have expressed concern that the Company’s plan to list its shares on NasdaqGS in such an incremental, phased manner will likely serve to dilute the value of the AFIN Class A shares, thus creating downward selling pressure on a stock that has already suffered considerable decline from its IPO pricing.  In addition, some shareholders have expressed concern over the fact that AFIN recently cut its dividend from approximately $1.30 to $1.10, effective July 1, 2018.  This amounts to a reduction in distribution of approximately 15% and is of particular concern to the many retail investors who initially purchased AFIN shares for their income component.