American Finance Trust (“AFIN”), formerly known as American Realty Capital Trust V, Inc., is a publicly registered non-traded real estate investment trust (“REIT”) that is based in New York, NY. Incorporated on January 22, 2013 as a Maryland REIT, AFIN is a diversified REIT with a focus on retail properties. As of September 30, 2017, AFIN owned a total of 517 properties. Because AFIN is registered with the SEC, the non-traded REIT was permitted to sell securities to the investing public at large, including numerous unsophisticated investors who bought shares through the initial public offering (“IPO”) upon the recommendation of a broker or money manager.
AFIN commenced its initial public offering in April 2013, which closed approximately six months later, raising $1.6 billion in investor equity. Investors who participated in the IPO paid $25 per share. In February 2017, AFIN completed a merger with another affiliated non-traded REIT: American Realty Capital – Retail Centers of America.
Non-traded REITs pose many risks that may not be readily apparent to investors, or adequately explained by the financial advisors and stockbrokers who recommend these complex investments. One significant risk associated with non-traded REITs has to do with their high up-front commissions, typically between 7-10%. In addition to high commissions, non-traded REITs like AFIN generally charge investors for certain due diligence and administrative fees, ranging anywhere from 1-3%. Such high fees (perhaps as high as 13-15%) act as an immediate ‘drag’ on any investment and can serve to compound losses.
Another significant risk associated with non-traded REITs concerns their illiquid nature. 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 AFIN, who may well have been uninformed of their liquidity issues, have come to learn too late that they can only redeem shares directly with the sponsor (and only then on a limited basis, and often at a disadvantageous price), or alternatively, sell the shares through a limited and fragmented secondary market.
On July 14, 2017, AFIN’s Board of Directors (“Board”) unanimously authorized a decrease on the dividend from $1.65 to $1.30 on an annualized basis. Furthermore, the Board also amended the share repurchase program, to be effective July 14, 2017. Under the new plan, investors in AFIN seeking to exit their investment position and sell shares back to the company may only do so following the death or qualifying disability of a stockholder.
Investors seeking to sell their AFIN shares through the secondary market are also encountering liquidity issues and the pricing inefficiency which tends to negatively impact illiquid investments. For example, shares of AFIN were recently listed on Central Trade & Transfer – a secondary market for private placements – at approximately $15.60 per share. Based on this price, and even when accounting for AFIN distributions, it appears that shareholders who purchased at $25 per share through the IPO will likely sustain considerable losses on their initial capital investment.
Brokers, and by extension their firm, are required to perform adequate due diligence on any investment that they recommend. Further, brokers are required to conduct a suitability analysis in order to determine if the recommended investment is in keeping with the investor’s stated objectives and risk profile.
If you have invested in AFIN, or another non-traded REIT, and you have suffered losses in connection with your investment (or are currently unable to exit your illiquid investment position without incurring considerable losses), you may be able to recover your losses in FINRA arbitration. Investors may contact a securities arbitration lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or via email at firstname.lastname@example.org for a no-cost, confidential consultation.