REIT's Guaranteed

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Nov 22, 2009 3:43 pm

I'm not licensed yet to sell REIT's but I have a client who has some in their portfolio and they are unhappy because they have been frozen and can't liquidate any of their position and the dividend has been decreased and has went from monthly to quarterly.  They aren't happy.

Their broker then has sent them another REIT offering with Cornerstone - he is telling them it is Guaranteed 7% for 3 years and then they can take their money out... I've read over the prospectus and I don't think anything is guaranteed.

Can someone who has experience with them help me out?

Thanks in advance.

Nov 22, 2009 5:22 pm

No it is not guaranteed.  It may have a 3 year buy back CDSC schedule but even that isn't guaranteed.  The dividends can go up or down depending on how well the REITs occupancy and cap rates are. 


All in all the nontraded REITs have been very successful.  the REIT they own (I'm assuming based on your descrption) that isn't doing so hot is Inland Western and it has had a few issues.   Inland is still a great company but yeah, it kind of does suck how that one has played out.  I've never heard of Cornerstone but none of them are guaranteed.  Alot of the new issue ones though shouldn't have the liquidity issues that Inland had because they don't have any debt to refinance.  I would make sure the client doesnt have more than 20% of their portfolio in the REITs.  They are great diversification tools to use for stability but this broker isn't disclosing it correctly if he's saying it's guaranteed. 
 
Most clients that have a bitter taste in their mouth from Inland Western likely aren't going to buy more of a nontraded REIT.  And that's too bad because their are some good ones out there paying 6.5+%. 
Nov 22, 2009 11:29 pm

Inland Western it is.

the new one is Cornerstone Realty - i think its from Pacific something... i'll check.

He told them it was 7% and in 3 years they can liquidate all their money...  guaranteed.

Nov 22, 2009 11:44 pm
gettingstarted:

Inland Western it is.

the new one is Cornerstone Realty - i think its from Pacific something... i'll check.

He told them it was 7% and in 3 years they can liquidate all their money...  guaranteed.


 
I think this is a good example of something a client sues over.  I bet he was told intitial rate of 7% with the option for guarnateed liquidity @ FMV in 3 years.  What he heard was gauranteed 7% with option for return of principal in 3 years.
Nov 22, 2009 11:56 pm

Yep, I read the prospectus and it says after 3 years they will pay 100% of share price and you can liquidate your shares, but there are conditions - the board could freeze liquidation, and only 5% of total shares can be liquidated,etc... lots of ways out to keep your money.  It even says they can lower the payout or change frequency....

Nov 23, 2009 8:11 am
gettingstarted:

Yep, I read the prospectus and it says after 3 years they will pay 100% of share price and you can liquidate your shares, but there are conditions - the board could freeze liquidation, and only 5% of total shares can be liquidated,etc... lots of ways out to keep your money.  It even says they can lower the payout or change frequency....

 
Gettingstarted, Here is what I would do if I were in your position:  Don't attack the product when you meet with this client.  Many of these REITs are very good investments and will continue to be so in the future.  They probably are a bit sour from Inland Western and thats fine.  I would go over with them that the REITs are not guaranteed in any way which they should be well aware of given the whole Inland Western scenario.  And that this advisor is not disclosing this investment correctly and that's why you should be their main man.  If that other advisor has other assets over and above the Inland, get them to move it to you now.  This other advisor obviously has his some integrity issues and is not selling honestly.  
Nov 23, 2009 2:35 pm

The only thing guaranteed is death and taxes; I would remove the word "guaranteed" form your vocab and replace it with "should"... or decent probability...

My 2c

Nov 23, 2009 7:36 pm

On another note, just got an e-mail today from KBS letting us know that KBS REIT I is lowering their share price from $10.00 to $7.17.  They were pretty heavy in the mezzanine loans but that doesn't add to my confidence in commercial real estate right now.

Nov 23, 2009 9:46 pm

I think it is a great opportunity for newer REITS... A lot of these older ones are going to have tor refinance debt, and may have to dump properties if they can't... I like KBS II and CCP III(can't go wrong with walmart and walgreens as tenants)

Nov 23, 2009 10:19 pm
Squash1:

I think it is a great opportunity for newer REITS... A lot of these older ones are going to have tor refinance debt, and may have to dump properties if they can't... I like KBS II and CCP III(can't go wrong with walmart and walgreens as tenants)

 
Totally true.  As for KBS, they haven't sold any properties and the revaluation is simply a true repricing of where property values are at now.  They're still 91% occupied and maintaining the same dividend.  The new REITs are in great positions to be buying disstressed properties dirt cheap and bring great returns over the next 5-7 years.  And by then, hopefully some of these older ones getting their teeth knocked in right now (Inland Western, Hines, KBS) will be back to original $10 in 5 years and provide some liquidity to shareholders that are upset. 
Nov 23, 2009 10:40 pm

I still think Inland American will be ok...That is a wanted REIT because of all the different properties in one REIT.

Nov 23, 2009 10:45 pm
Baldy McGrindy:
Squash1:

I think it is a great opportunity for newer REITS... A lot of these older ones are going to have tor refinance debt, and may have to dump properties if they can't... I like KBS II and CCP III(can't go wrong with walmart and walgreens as tenants)

 
Totally true.  As for KBS, they haven't sold any properties and the revaluation is simply a true repricing of where property values are at now.  They're still 91% occupied and maintaining the same dividend.  The new REITs are in great positions to be buying disstressed properties dirt cheap and bring great returns over the next 5-7 years.  And by then, hopefully some of these older ones getting their teeth knocked in right now (Inland Western, Hines, KBS) will be back to original $10 in 5 years and provide some liquidity to shareholders that are upset. 
 
Yep, agree 100%.  The main thing to worry about in the meantime is the clients getting their statements and seeing their REIT's that were not supposed to have volatile share price suddenly 29% lower.  In 5 years it won't matter though.  I'm glad the dividends are still based off of the $10/share cost, and not the current $7.17/share price.  KBS I mean.
Nov 23, 2009 10:58 pm
Squash1:

I still think Inland American will be ok...That is a wanted REIT because of all the different properties in one REIT.

 
I don't think American is out of the woods on repricing.  A good chunck of their portfolio is hotel/lodging properties that are one of the worst performing assets in that market.  I hope it doesn't get repriced down but who knows. 
Nov 24, 2009 10:15 am

Probably not, but I bet some of the caps will change(lower)

Nov 27, 2009 7:55 pm
Squash1:

I think it is a great opportunity for newer REITS... A lot of these older ones are going to have tor refinance debt, and may have to dump properties if they can't... I like KBS II and CCP III(can't go wrong with walmart and walgreens as tenants)

 
 
agree completely.  been using AR Capital a bit lately.  great time to be buying QUALITY in the real estate market.
Nov 28, 2009 11:58 pm

Cap rates to my knowledge are based on the differences between interest rates and market returns.

 
But with low interest rates the insurance company has greater liability.
 
Also since 1950 with an 8% cap on the s&P 500 has had a result of 5.1% almost indentical to the 5.2% "risk free rate" of t-bills over the same period.
Nov 29, 2009 3:01 pm

I use them i think they are good for a portion of a clients money...

 
Where is my conflict..
Feb 25, 2010 2:14 am

New REIT programs could be good, but look carefully at dividend quality.  KBS and Inland Western are only two of many that have shut down their share repurchase programs; Hines just closed it's repurchase program and will likely revalue its shares in the next couple of months.  Inland Western's valuation looks suspect:

http://www.reitwrecks.com/forum/viewtopic.php?f=2&t=7

Mar 6, 2010 1:39 am

Inland Western has dropped to $6.85 a share...

Mar 7, 2010 7:57 pm

Inland Western has dropped to $6.85 a share...

 
 
Product of buying at the wrong time(not that anyone knew).. Just like buying tech at the wrong time before the internet crash..