Articles Posted in REITs

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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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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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Building DemolishedInvestors in Strategic Storage Growth Trust, Inc. (“Strategic Storage” or the “Company”) may have arbitration claims to be pursued before FINRA, in the event that their 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.  As recently reported, Strategic Storage’s board of directors has elected to suspend its distribution reinvestment plan, as well as its share redemption program, as it seeks to shore up its finances and explore potential liquidity options.  Given the fact that one of the Company’s stated primary investment objectives is to “grow net cash flow from operations in order to provide sustainable cash distributions… over the long-term” many retail investors who invested because of the Company’s income component are now faced with the prospect of holding an illiquid, non-traded investment that no longer provides valuable monthly income.

According to publicly available documents filed with the SEC, Strategic Storage was formed on March 12, 2013 as a Maryland corporation for the “[p]urpose of engaging in the business of investing in self storage facilities and related self storage real estate investments.”  The Company’s portfolio currently consists of 26 operating self storage facilities, in addition to two properties in development.  Strategic Storage launched its offering in January 2015, in the process raising approximately $193 million through issuance of Class A shares and approximately $79 million through issuance of Class T shares.

Strategic Storage is structured as an operating business, but qualifies as a REIT for federal income tax purposes.  For many investors, their primary motivation to invest in a REIT is to capture an enhanced income stream from the tax-advantaged REIT structure.  Importantly, however, Strategic Storage is a non-traded REIT, meaning that the investment is illiquid in nature and not easily sold (typically, many non-traded REIT’s offer a share redemption program, but these programs are often limited both as to when an investor may redeem and the amount of shares available for actual redemption).

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investing in real estate through a limited partnershipAs recently announced, the board of directors of Hines Real Estate Investment Trust, Inc. (“Hines REIT” or the “Company”) — one of three publicly registered non-traded REITs sponsored by Hines — has unanimously voted for approval of a plan of liquidation and dissolution of the Company (“Liquidation Plan”).  Under the Liquidation Plan, which calls for  shareholder approval, the Company will sell seven of its West Coast office building assets in a cash transaction valued at $1.162 billion to an affiliate of Blackstone Real Estate Partners VIII.  In addition, Hines REIT also seeks to liquidate the remainder of its portfolio, including Chase Tower in Dallas, TX, 321 North Clark in Chicago, and a grocery-anchored retail portfolio located in the Southeastern U.S.

Pursuant to the Liquidation Plan, Hines REIT shareholders will receive $0.08 per share, to be paid on or about July 31, 2018.  Specifically, the Liquidation Plan entails a final distribution of $0.07 per share, as well as an additional $0.01 per share stemming from a recent class action settlement.  The class action settlement involves a lawsuit filed by Baltimore City in the Circuit Court of Maryland, alleging breach of fiduciary duty, waste of corporate assets, and misappropriation of assets surrounding certain payments made in connection with the Liquidation Plan.

Hines REIT shareholders previously approved the Liquidation Plan in November 2016; subsequent to shareholder approval, the Company declared an initial liquidating distribution of $6.20 per share in December 2016, as well as a $0.30 per share liquidating distribution in April 2017.  Following the final distribution of $0.08 per share, Hines REIT investors will have received total special and liquidating distributions of approximately $7.59 per share, in addition to regular annual distributions.  Shares were originally sold for $10 each.

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Piggy Bank in a CageInvestors in Phillips Edison Grocery Center REIT II (“Phillips Edison II”) were recently solicited by third-party real estate investment management firm MacKenzie Realty Capital, Inc. (“MacKenzie”) in relation to a mini tender offer to purchase Phillips Edison II shares at $14.89 per share.  Investors who purchased Phillips Edison II shares through the initial offering acquired their shares at $25 per share (and at $23.75 per share for shares subsequently acquired through the dividend reinvestment program).  Accordingly, investors seeking immediate liquidity who elect to participate in the MacKenzie tender offer will incur substantial losses of approximately 40% on their initial investment (excluding commissions and fees, as well any dividend income received to date).

Phillips Edison II was incorporated in June 2013 and is a publicly registered, non-traded REIT.  As set forth in its prospectus, Phillips Edison II was “formed to leverage the expertise of our sponsors… and capitalize on the market opportunity to acquire and manage grocery-anchored neighborhood and community shopping centers located in strong demographic markets throughout the United States.”  As a publicly registered non-traded REIT, Phillips Edison II was permitted to sell securities to the investing public at large, and as such, the non-traded REIT was marketed nationwide to numerous unsophisticated retail investors.  In certain instances, some investors were not fully informed by their financial advisor as to the complex nature and risks associated with non-traded REITs.

Non-traded REITs pose many risks that are often not readily apparent to retail investors, or adequately explained by the financial advisors and stockbrokers who recommend these complex investments.  To begin, one significant risk associated with non-traded REITs has to do with their high up-front commissions, typically between 7-10%; in the case of Phillips Edison II, its prospectus indicates that investors were charged a “selling commission” of 7%.  In addition to high commissions, non-traded REITs like Phillips Edison II generally charge investors for certain due diligence and administrative fees, ranging anywhere from 1-3%; as set forth in its prospectus, Phillips Edison II charged investors a 3% dealer manager fee of up to 3% of gross offering proceeds.  Such high commission and fees act as an immediate “drag” on an investment.

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Building DemolishedInvestors in Griffin Capital Essential Asset REIT, Inc. (“Griffin Essential”), may have substantial losses based on a tender offer to purchase shares for $6.89 a share — or $3.11 a share less than the offering price of $10 a share.  As recently reported, on December 1, 2017, third-party real estate investment firm MacKenzie Capital Management (“MacKenzie”) made an unsolicited tender offer for shares of Griffin Essential at $6.89 per share, in cash.  The Board of Directors of Griffin Essential has recommended that its shareholders reject the offer.  However, the Board also advised that, as of September 30, 2017, its share redemption program (“SRP”) for 2017 was fully subscribed, thus leaving investors seeking liquidity via redemption with little recourse.

Griffin Essential is a Maryland REIT incorporated in August 2008 for purposes of acquiring a portfolio of geographically diverse single tenant properties across a wide range of industries.  From 2009 – 2014, Griffin Essential conducted a series of offerings in connection with its capital raise.  In aggregate, the non-traded REIT issued 126,592,885 shares of common stock for gross proceeds of approximately $1.3 billion.  As a publicly registered non-traded REIT, Griffin Essential 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 money manager.

Investors who purchased shares of Griffin Essential through the offering acquired their shares for approximately $10 per share.  Therefore, it would appear that investors who participated in the MacKenzie tender offer incurred substantial losses on their initial investment in excess of 30% (exclusive of commissions and distributions).

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investing in real estate through a limited partnershipInvestors in NorthStar Healthcare Income, Inc. (“NHI REIT”) are likely facing substantial principal losses based on recently reported transactions.  Although liquidity is limited, NHI REIT investors may be able to sell shares through a limited and fragmented secondary market.  Recently, NHI REIT shares were listed for sale on a secondary platform at $6.70 per share.  Thus, for investors who bought in through the IPO at $10 per share, it would appear that they have sustained losses of roughly 1/3 on their initial capital outlay (these losses are exclusive of distribution income received to date).

NHI REIT investors also may have arbitration claims to be pursued before FINRA, if their 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.  According to its prospectus, NHI REIT was formed as a Maryland corporation in October 2010 for the purpose of acquiring, originating and managing a “[d]iversified portfolio of equity and debt investments in healthcare real estate, with a focus on the mid-acuity senior housing sector.”

Headquartered in New York, New York, NHI REIT is a publicly registered non-traded real estate investment trust.  As of November 2015, NHI REIT’s portfolio consisted of 20 investments, including 16 equity investments with a total cost of $942.7 million, and 4 debt investments with a principal amount of $145.9 million.  Pursuant to its offering, which closed December 17, 2015, NHI REIT offered up to $500,000,000 in shares of its common stock at a price of $10.20 per share, in addition to $200,000,000 in shares offered under the REIT’s amended and restated distribution reinvestment plan, at a price of $9.69 per share.

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Building DemolishedInvestors in American Realty Capital New York City REIT (“ARC NYC REIT”), may have arbitration claims to be pursued before the Financial Industry Regulatory Authority (“FINRA”), if their ARC NYC REIT 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 or financial advisor.  According to its website, ARC NYC REIT is structured to provide its investors with a combination of current income and capital appreciation through strategic investments in high-quality commercial real estate located throughout the five boroughs of New York City.

As recently reported, the Board of ARC NYC REIT has elected to suspend distributions, effective March 1, 2018.  According to the Board, the suspension of future distributions was made in order to enhance the non-traded REIT’s ability to execute on acquisitions, as well as conduct repositioning and leasing efforts related to its property portfolio.  As a publicly registered non-traded REIT, ARC NYC REIT was incorporated in December 2013 and is registered with the SEC.  Accordingly, ARC NYC REIT was permitted to sell securities to the investing public at large, including numerous unsophisticated retail investors who bought shares through the initial public offering (“IPO”) upon the recommendation of a broker or money manager at $25 per share.  Secondary market transactions in ARC NYC REIT shares have reportedly taken place at prices of between $13.75 and $14.25 a share (although the sponsor indicates the NAV of ARC NYC REIT shares is $20.26 a share).

Unlike traditional stocks and publicly traded REITs, non-traded REITs do not trade on a national securities exchange.  Therefore, many investors in non-traded REITs like ARC NYC REIT, have limited options when it comes to exiting their investment position.  For example, investors in non-traded REITs typically can only redeem shares directly with the sponsor on a limited basis, and often at a disadvantageous price.  Or, investors may be able to sell shares through a limited and fragmented secondary market.  Finally, investors may be presented with limited market-driven opportunities — such as a tender offer — to sell their shares at a disadvantageous price.

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Building ExplodesInvestors in certain REITs based in Las Vegas may have arbitration claims against brokers or financial advisors if a FINRA-registered broker dealer that recommended the investment did not live up to its obligations under applicable rules.   As members and associated persons of FINRA, brokerage firms and their financial advisors must ensure that adequate due diligence is performed on any investment that is recommended to investors.  Further, firms and their brokers must ensure that investors are informed of the risks associated with an investment, and must conduct a suitability analysis to determine if an investment meets an investor’s stated investment objectives and risk profile.  Either an unsuitable recommendation to purchase an investment or a misrepresentation concerning the nature and characteristics of the investment may give rise to a claim against a stockbroker or financial advisor.

Vestin Realty Mortgage I (Previously Vestin Fund I and DM Mortgage Investors)

Vestin Realty Mortgage I (VRM I) was formerly known as DM Mortgage Investors. On March 17, 2000, DM Mortgage Investors registered up to 100,000,000 shares with the Securities and Exchange Commission (SEC) at $1 per share.  This registration was later amended to cover the issuance of up to 10,000,000 shares at $10 per share.  On June 29, 2001, DM Mortgage Investors changed its name to Vestin Fund I, and later changed its name to Vestin Realty Mortgage I (VRM I) and began trading on the Nasdaq Capital Market on June 1, 2006.  In March 2012, VRM I ceased being a REIT, but continued trading on the Nasdaq.

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Money In WindInvestors in American Realty Capital Healthcare Trust III Inc. (“ARC HT III”) may be able to recover losses on their investment in FINRA arbitration.  ARC HT III is a publicly registered non-traded real estate investment trust (“REIT”) sponsored by AR Global and based in New York, NY.  As its name suggests, this non-traded REIT is focused primarily on investing in healthcare-related assets including medical office buildings, seniors housing and other healthcare-related facilities.  ARC HT III currently owns a portfolio of 19 properties purchased for a total of $128.3 million.

ARC HT III raised approximately $168 million in investor equity prior to cancellation of its securities offering, due in large part to a series of ARC related scandals.  On July 19, 2017, ARC HT III announced an estimated net asset value (“NAV”) per share of $17.64.  Investors who participated in the offering bought in at $25 per share.  Additionally, on July 18, 2017, the ARC HT III Board determined that it would cease paying distributions beginning in August 2017.  One of the risks associated with investing in non-traded REITs concerns the viability of the distribution payment.  At its discretion, the board of a non-traded REIT may well decide to substantially reduce, or altogether suspend, payments of distributions to investors.  This is troubling, particularly because many investors are advised to purchase non-traded REITs as a means of earning enhanced income.

On December 21, 2017, ARC HT III shareholders will vote at the annual meeting to be held at 4pm at The Core Club in New York, NY, on an important proposal.  Specifically, shareholders will be asked to vote on a plan of liquidation and dissolution of the company.  Pursuant to the proposed plan of liquidation, ARC HT III shareholders will receive $17.67 – $17.81 per share of stock held.  As part of the contemplated liquidation, the non-traded REIT anticipates paying an initial liquidation distribution of $15.75 per share, expected to be paid within two weeks of closing the asset sale.  In connection with the transaction, ARC HT III will sell its underlying property portfolio for $120 million to the affiliated entity – Healthcare Trust Inc.  In order for the plan of liquidation to become effective, shareholders must vote to approve both the contemplated purchase of ARC HT III by Healthcare Trust Inc., as well as the proposal to liquidate the company.