Articles Tagged with REIT losses

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BuildingInvestors in Strategic Realty Trust, Inc. (“SRT” or the “Company” — formerly known as TNP Strategic Retail Trust, Inc.), a REIT based in San Mateo, California, may face principal losses if they attempt to sell their shares in the illiquid and fragmented secondary market.  SRT invests in and manages a portfolio of income-producing properties, including various shopping centers, primarily in Western U.S. locations.  Structured as a Maryland corporation that qualifies as a REIT, SRT was formed in September 2008.  By August 2009, the Company had initiated its public offering at $10 per share for up to $1 billion in investor equity.

Retail investors commonly are solicited by financial advisors or stockbrokers to invest in non-traded REITs like SRT, which typically are sold by independent broker-dealer firms.  Unfortunately, customers who purchased shares through SRT’s IPO upon the recommendation of a broker may, in certain instances, have been solicited via misleading sales presentations that failed to adequately disclose the complex nature of the investment, its negative features, and its risks.  Risks associated with non-traded REITs include high up-front commissions (as high as 7-10%), high due diligence and administrative expenses, risk of loss of principal, and illiquidity.

Investors in non-traded REITs including SRT may come to find out too late that their shares are illiquid, and their options to exit the investment are limited.  Briefly, investors seeking liquidity may: (i) seek to redeem their shares directly with the sponsor (SRT suspended its redemption program altogether from January 15, 2013 – April 1, 2015), (ii) be presented with limited, market-driven opportunities to tender their shares to a third party investment firm (typically at a disadvantageous price), or (iii) sell their shares on a limited and fragmented secondary market specializing in creating a trading platform for illiquid securities.

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Money in WastebasketThird-party real estate investment firm Everest REIT Investors I, LLC (“Everest”) recently launched an unsolicited tender offer to purchase up to 780,000 shares of common stock in Cole Credit Property Trust IV, Inc. (“Cole Credit IV”), at $6.60 per share.

Cole Credit IV was formed in July 2010 and is structured as a publicly registered, non-traded REIT.  Shares issued through its offering were priced at $10 per share.  As of December 31, 2017, Cole Credit IV had raised approximately $3.4 billion in investor equity.  While the non-traded REIT has most recently estimated its share value at $9.37 per share, Cole Credit IV further “states that such figure is based on numerous assumptions and judgments and there can be no assurances that such amount would be realized upon a liquidation of assets or other liquidity event.”

Non-traded REITs pose a great deal of risks that are often 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 like Cole Credit IV generally charge investors for certain due diligence and administrative fees, ranging anywhere from 1-3%.

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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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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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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 AR Global’s Healthcare Trust, Inc. (“HTI”), may have FINRA arbitration claims, 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 stock broker.  AR Global’s HTI was incorporated on October 15, 2012, as a Maryland corporation that elected to be taxed as a real estate investment trust (REIT).  HTI invests in multi-tenant medical office buildings and, as of year-end 2017, owned a portfolio consisting of 8.4 million-square-feet including 164 properties, with a total purchase price of $2.3 billion.

As a publicly registered non-traded REIT, HTI 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.  HTI terminated its offering in November 2014 after raising approximately $2.2 billion in investor equity.

Recently, third party real estate investment firm MacKenzie Realty Capital, LP (“MacKenzie”) initiated an unsolicited mini-tender offer to purchase up to 1 million shares of HTI for $10.99 per share.  Accordingly, investors who acquired HTI shares through the offering at $25 per share will incur substantial losses on their initial investment of approximately 55% (exclusive of commissions paid and distributions received to date).

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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.