Hospitality Investors Trust Inc. (“HIT”), previously known as American Realty Capital Hospitality Trust, recently announced a net asset value (NAV) of $9.21/share, representing a 33.6% decrease from the last announced NAV of $13.87/share. The Board of HIT stated that this decrease in NAV was due to lower estimates of occupancy, increase in competition, and increase in costs.
As we previously reported, back in October 2018, the company, a public, non-traded real estate investment (REIT) with a focus on hospitality properties in the United States, announced a share repurchase program at $9.00/share effective December 31, 2018. At the time, $9.00/share was an approximate 35% discount to the REIT’s then most recent NAV of $13.87/share. When HIT’s board announced the buyback program in October, they recommended that only those investors that required immediate liquidity should sell their shares, as the $9.00/share price was a significant decrease in the current market value. The buyback program only lasted until February 2019.
HIT shares were originally offered at $25.00 a share, leaving investors at the initial offering price with principal losses of about 60% (not accounting for distributions).
Non-traded REITs are risky investments for investors, but lucrative for financial advisors and brokerages. Many investors have reportedly been pressured into investing in non-traded REITs by their financial advisors or brokers, without ever receiving the proper explanation as to the risk and complexity of non-traded REITS. Further, once invested, investors, are often forced to rely upon the REIT’s own estimate of its value, since non-traded REIT shares do not trade in a liquid public market like shares of stock.
Non-traded REITs’ risks often are not readily apparent to retail investors, and may not be adequately explained by the financial advisors and stockbrokers who recommend these complex investments. One significant risk associated with non-traded REITs concerns their high up-front commissions, typically between 7-10%. In addition to high commissions, non-traded REITs generally charge investors for certain due diligence and administrative fees, ranging anywhere from 1-3%. Thus, only 85-90% of invested capital is typically deployed in purchasing real estate investments for the REITs (the remaining 10-15% having been consumed up front by commissions and fees). Not surprisingly, non-traded REITs have historically substantially underperformed publicly traded REITs, which deploy a much larger percentage of invested capital in purchasing real estate investments due to their much lower commissions and fees.
Likely the greatest risk associated with non-traded REITs involves their illiquid nature. Unlike traditional stocks and mutual funds, non-traded REITs do not trade on a national securities exchange. Unfortunately, many uninitiated investors in non-traded REITs have come to learn too late that their ability to exit their investment position is limited. Investors in non-traded REITs can sometimes exit their investment through redemption directly with the sponsor (as in the case of HIT’s now-suspended repurchase program), but such redemptions are limited, both as to timing (often redemptions are only done on a quarterly basis), as well as amount (any redemption will be subject to certain terms, including an overall limit on the aggregate number of shares that the REIT will permit to be redeemed at a given time). Investors may also be able to sell shares through tender offers from time to time or via a limited secondary market.
Investors with questions about possible claims concerning HIT or another non-traded REIT or non-conventional investment may contact a securities arbitration lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or via email at email@example.com for a no-cost, confidential consultation. Attorneys at the firm are admitted in New York, New Jersey and Wisconsin and various federal courts around the country, and handle cases nationwide (in cooperation with attorneys located in those states if required by applicable rules).