Non-Listed REIT Lifecycle Ideal for Today’s Market Conditions

This writing corrects factual errors included in a previous version of the article.

Recent events in the real estate sector have created an improving market for investors. Many advisors are already knowledgeable about the benefits of investing in Direct Investments, particularly Non-Listed Real Estate Investment Trusts (NL REITs), to best serve their clients. I would suggest this is an excellent time for advisors and investors alike to become even more comfortable with diversifying their portfolio with commercial real estate.

NL REITs are a disciplined investment designed to be held for seven to 10 years, offering investors a potentially tremendous benefit of illiquidity, which may safeguard them from making poorly-timed market decisions. NL REITs have a unique lifecycle which potentially allows investors to not only receive returns, but a hedge against inflation.

In the early stages of a NL REIT, a sponsor company raises funds from both private and institutional investors while purchasing real estate assets during an offering period. After closing the NL REIT to additional investors, the sponsor will continue to use the raised capital to finance the purchase of commercial real estate, such as multi-tenant apartment buildings, retail properties, office buildings or industrial facilities. During the majority of the product’s lifecycle, investors generally receive dividends until the final stage; the liquidation event.

Since these products are long-term investments, a NL REIT takes an average of about nine years to mature to a point at which it can execute an exit strategy. The sponsor company can liquidate the NL REIT’s assets in a number of ways, including listing on a stock exchange, extending its non-public status or actually selling the properties to return investors’ capital.

Twenty-three offerings have gone full cycle to date. Most recently, American Realty Capital Trust (ARCT) and W. P. Carey announced transactions that would provide investors in their NL REITs with liquidity via the public stock market.

On March 1, 2012, less than seven months after closing its public non-listed real estate offering, ARCT (NASDAQ:ARCT) internalized its management team and listed its shares of common stock on the Nasdaq Global Select Market. The approximately 178 million shares listed were originally sold at a $10.00 per share purchase price (for retail investors) during the company's public non-listed offering which ended in July, 2011. The stock closed at $10.49 on its listing day, with approximately 4.5 million shares traded.

W. P. Carey’s NL REIT, CPA:15, announced in February a proposal under which it would be acquired by its advisor, W. P. Carey & Co. LLC, which is already publicly traded on the New York Stock Exchange under the symbol “WPC.” Provided all approvals are received and the transaction closes on the agreed upon terms, investors would receive $1.25 in cash and 0.2326 shares of newly formed REIT, W. P. Carey Inc. Although the value of the stock portion of the transaction consideration is subject to fluctuation and will be determined on the date the transaction closes, based on the closing price of WPC stock on February 17, the date the transaction was signed, CPA:15 investors would see a total return of approximately 184 percent.

These are but two examples of a NL REIT providing potentially significant returns to investors after going full-cycle. As the real estate market continues to recover, the potential for greater returns and dividends may increase.

In a distinctly different approach to product design, NL REITs are purposely built to be held. This structure makes them powerful and effective for investors who do not need immediate liquidity and want to balance their portfolio with a long-term investment. During the majority of its lifespan, the NL REIT tends to have a low correlation to the stock market, which can help diversify a portfolio of short-term, liquid investments.

Now is the time to invest in Direct Investments, as they are primed to not only survive, but perform well in today’s market conditions. Diversifying suitable clients’ portfolios with these products may provide investors with dividends and capital appreciation through a liquidation event.

For more information about Direct Investments, including NL REITs, advisors can visit the Investment Program Association’s website to access a collection of educational materials designed to help advisors understand these unique products and learn how they can work for their clients.

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