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Bogleheads
Investing Advice Inspired by Jack Bogle
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BruceM
Joined: 08 Aug 2008
Posts: 1078
Location: Manzanita, Oregon
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 Posted: Thu Feb 25, 2010 1:36 pm Post subject: Some recent information on Unlisted REITs |
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A couple of recent articles on two unlisted REITs: Apple REIT and Inland Western REIT.
http://www.reitwrecks.com/foru....=2&t=2
http://www.reitwrecks.com/foru....=2&t=7
Unless and until the Commercial RE market turns the corner and is able to borrow at reasonable rates and can lease most of its space at profitable rates, the poor souls holding these unlisted shares, I fear, may be in for a most unpleasant surprise. And what's particularly sad is these were heavily marketed to retirees as a means of regular reliable income and price stability (those nasty free markets keep moving the price of exchange traded REITs around all the time).
BruceM |
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stratton
Joined: 04 Mar 2007
Posts: 7905
Location: Puget Sound
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| Posted: Fri Feb 26, 2010 1:41 am Post subject: |
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I didn't realize REIT Wrecks had forums. Thank!
Unlisted REITs make sales loaded mutual funds look good. 
Paul |
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fishndoc
Joined: 11 Apr 2007
Posts: 1157
Location: Kennesaw, GA
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| Posted: Fri Feb 26, 2010 9:15 am Post subject: |
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thanks Bruce, good info as usual.
Naivety of some "investors" never ceases to amaze me:
| Quote: | | I own a number of shares in Apple REITS. So far, these have been wonderful investment vehicles. They pay out 8% a year. I always love opening my David Lerner statement (the brokerage firm that manages these REITS for Apple). However, I am concerned about the borrowing that Apple is undertaking to meet current expenses (dividend payouts). |
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" Successful investing involves doing just a few things right, and avoiding serious mistakes." - J. Bogle |
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pkcrafter
Joined: 04 Mar 2007
Posts: 2985
Location: CA
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| Posted: Fri Feb 26, 2010 11:19 am Post subject: Apple |
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You mean Apple 8% returns don't grow on trees? Thanks for the update. I've heard several investors tout Apple REIT, but was not familiar with Island Western.
Paul
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REIT Wrecks
Joined: 26 Feb 2010
Posts: 5
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| Posted: Fri Feb 26, 2010 2:51 pm Post subject: |
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| stratton wrote: | | I didn't realize REIT Wrecks had forums |
Hi guys, thanks for this. This is my first post here; it's a real honor to have my posts referenced in this forum.
The RW forum is indeed new, and Bogleheads will continue to be one of the inspirations for it. I have been a frequent visitor here, and I always enjoy reading your posts on this topic.
As you may have guessed, another inspiration for the forum was the egregious amount of fees and expenses charged by direct investment sponsors, and the poor alignment of interests that this creates.
There should be - or needs to be - a better way to get true real estate exposure for smaller investors. Public REITs and CRE index funds are not always the best solution, as they are often highly correlated to equities. I'm not sure what the answer is, but I hope to explore all the options in great depth. It's certainly a timely topic!
Best wishes to you, and thanks again. |
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BruceM
Joined: 08 Aug 2008
Posts: 1078
Location: Manzanita, Oregon
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| Posted: Fri Feb 26, 2010 4:37 pm Post subject: |
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Hey REIT-Wreck
I must confess I got the link from TMF REIT investing forum.
As relates to the Apple REIT, I especially like your reference to this unlisted REIT as a Ponzi-Scheme, which, if they're paying current distributions using new sales income, sure sounds like its headed in that direction.
Per my posting over at TMF, I think what the unlisteds like Apple are trying to do is to artifically support the distribution with loans and recent share sales in hopes that the economy will pick up, their occupancy rates will pick up and they'll be able to support the distribution with the REITs earnings and valuations will again return so they can support the fixed $10/share. It almost seems like their low debt is simply being used as a reserve to 'fill' up during the 'bad years' in hopes that the 'good years' will return them to what they had originally promised shareholders. Of course, like insurance products with baseline guranatees, the buyer gives up much or even all of the upside. What do you think? (I ask just out of curiosity)
Hope you can hang around and offer your input as the subjects of REITs come up. I'm a long time holder of mostly health care REITs for their very reliable, albeit slow growth, dividends.
BruceM |
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REIT Wrecks
Joined: 26 Feb 2010
Posts: 5
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| Posted: Fri Feb 26, 2010 7:01 pm Post subject: |
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Ah well, TMF is almost as good  I like the healthcare REITs too - steady eddies.
As far as your impression about the non-traded REITs, you are correct in your perception of what they're doing, but I would take it a step further: Many have low leverage, but some have more debt than they can handle, and MOST are paying dividends using proceeds from new investors.
You've already been on the site, so take a look at the comparison I posted there. It shows debt/equity ratios and dividend coverage for 43 non-traded REITs (not to mention fees). Only five of these 43 are covering their dividends with operating cash flow.
That dividend money is coming from new shareholders and debt, not earnings. Imagine your 78 year old aunt sifting through a 10Q every quarter to figure this out. Ain't gonna happen, and that's just fine with most sponsors. |
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Valuethinker
Joined: 11 May 2007
Posts: 12890
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| Posted: Sat Feb 27, 2010 10:35 am Post subject: |
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| REIT Wrecks wrote: | Ah well, TMF is almost as good I like the healthcare REITs too - steady eddies.
As far as your impression about the non-traded REITs, you are correct in your perception of what they're doing, but I would take it a step further: Many have low leverage, but some have more debt than they can handle, and MOST are paying dividends using proceeds from new investors.
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If true that latter is called a Ponzi Scheme.
Usually it counts as fraud-- see Madoff.
Are they really able to commit what would be tantamount to fraud?
| Quote: |
You've already been on the site, so take a look at the comparison I posted there. It shows debt/equity ratios and dividend coverage for 43 non-traded REITs (not to mention fees). Only five of these 43 are covering their dividends with operating cash flow.
That dividend money is coming from new shareholders and debt, not earnings. Imagine your 78 year old aunt sifting through a 10Q every quarter to figure this out. Ain't gonna happen, and that's just fine with most sponsors. |
See above. A Madoff-type situation. |
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stratton
Joined: 04 Mar 2007
Posts: 7905
Location: Puget Sound
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| Posted: Sat Feb 27, 2010 10:09 pm Post subject: |
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| REIT Wrecks wrote: | | As far as your impression about the non-traded REITs, you are correct in your perception of what they're doing, but I would take it a step further: Many have low leverage, but some have more debt than they can handle, and MOST are paying dividends using proceeds from new investors. |
This is apparently typical of funds that start up and don't even own property. There was a Forbes artical raking them over the coals on this practice.
Paul |
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Valuethinker
Joined: 11 May 2007
Posts: 12890
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| Posted: Sun Feb 28, 2010 9:53 am Post subject: |
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| stratton wrote: | | REIT Wrecks wrote: | | As far as your impression about the non-traded REITs, you are correct in your perception of what they're doing, but I would take it a step further: Many have low leverage, but some have more debt than they can handle, and MOST are paying dividends using proceeds from new investors. |
This is apparently typical of funds that start up and don't even own property. There was a Forbes artical raking them over the coals on this practice.
Paul |
Interesting how they get around US Securities Law. In other contexts, that is called fraud.
I guess it can be done (obviously) but I don't know how-- not a lawyer. |
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alec
Joined: 02 Mar 2007
Posts: 1493
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| Posted: Sun Feb 28, 2010 1:37 pm Post subject: |
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| Valuethinker wrote: | | stratton wrote: | | REIT Wrecks wrote: | | As far as your impression about the non-traded REITs, you are correct in your perception of what they're doing, but I would take it a step further: Many have low leverage, but some have more debt than they can handle, and MOST are paying dividends using proceeds from new investors. |
This is apparently typical of funds that start up and don't even own property. There was a Forbes artical raking them over the coals on this practice.
Paul |
Interesting how they get around US Securities Law. In other contexts, that is called fraud.
I guess it can be done (obviously) but I don't know how-- not a lawyer. |
It's probably not fraud if the massive increase it debt is disclosed - like in the quarterly reports available to shareholders.
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"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair |
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Bobalude
Joined: 28 Feb 2010
Posts: 114
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| Posted: Sun Feb 28, 2010 2:47 pm Post subject: |
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| This is another reminder that people should not put their money into things that they do not FULLY understand. |
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Valuethinker
Joined: 11 May 2007
Posts: 12890
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| Posted: Mon Mar 01, 2010 5:43 am Post subject: |
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| alec wrote: | | Valuethinker wrote: | | stratton wrote: | | REIT Wrecks wrote: | | As far as your impression about the non-traded REITs, you are correct in your perception of what they're doing, but I would take it a step further: Many have low leverage, but some have more debt than they can handle, and MOST are paying dividends using proceeds from new investors. |
This is apparently typical of funds that start up and don't even own property. There was a Forbes artical raking them over the coals on this practice.
Paul |
Interesting how they get around US Securities Law. In other contexts, that is called fraud.
I guess it can be done (obviously) but I don't know how-- not a lawyer. |
It's probably not fraud if the massive increase it debt is disclosed - like in the quarterly reports available to shareholders. |
Here is my (possiblyl incorrect) logic:
- in a mutual fund I buy units. Units are issued to me, the proceeds go to the fund to buy assets
- you sell units (redeem). Assets of the fund are sold to give you cash
Now there is 'banking' in that most mutual funds keep a cash balance to fund redemptions.
But in an illiquid asset like commercial property (not REITs, but actual buildings that a REIT owns) if they take my money and use it to fund dividends or redemptions to you, then in effect they are running a Ponzi scheme?
Because they are not buying assets with my money.
I recognize this is not clear cut because (as I say) mutual funds do 'bank'.
It seems to me the fairest structure is a closed end one. There could be an over the counter market for units. I buy a unit from someone who is prepared to sell, at a price we agree (based on audited NAV I assume). The original money that financed the portfolio came from raising the fund in the first place, from all new investors.
Then you cannot have this 'Ponzi scheme' scenario. If you and I trade units in the secondary market, units are neither created nor destroyed-- hence no Ponzi risk.
Eventually the fund will be wound up (all the buildings sold) and the original investors will get back whatever is residual. Or they can vote to renew the fund, if the track record has been good.
The reason for the difference from an ETF or ordinary mutual fund is because the underlying assets are completely illiquid and are only bought and sold over a period of years. So a purchase or a sale of units which changes the number of units in issue cannot simply be reflected in the purchase of more underlying stocks or bonds.
The managers of the CEF or LLP could still use debt leverage to raise the NAV, and the risk profile, of the fund. Except for TIAA Real Estate annuity, most REIT managers (and private Limited Partnership managers) do do so. TIAA does this to a more limited extent. |
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Debbie
Joined: 15 Apr 2010
Posts: 1
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| Posted: Thu Apr 15, 2010 11:24 am Post subject: Heathcare Trust of America |
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| Any thoughts on Healthcare Trust of America? |
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BruceM
Joined: 08 Aug 2008
Posts: 1078
Location: Manzanita, Oregon
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| Posted: Thu Apr 15, 2010 6:04 pm Post subject: |
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| Valuethinker wrote: | | But in an illiquid asset like commercial property (not REITs, but actual buildings that a REIT owns) if they take my money and use it to fund dividends or redemptions to you, then in effect they are running a Ponzi scheme? |
Only to the extent that distributions to share(unit)holders exceeds the net REIT taxable income (plus any realized capital gains and net income from taxable REIT subsidiaries, for the few that have them). This excess distribution is a return of capital, and would only be a PONZI scheme to the extent the REIT has no net worth...that is, its liabilities exceed its assets.
| Valuethinker wrote: | It seems to me the fairest structure is a closed end one. There could be an over the counter market for units. I buy a unit from someone who is prepared to sell, at a price we agree (based on audited NAV I assume). The original money that financed the portfolio came from raising the fund in the first place, from all new investors.
Then you cannot have this 'Ponzi scheme' scenario. If you and I trade units in the secondary market, units are neither created nor destroyed-- hence no Ponzi risk. |
This is true to the extent shares (units) are traded in the secondary markets. But keep in mind, unlisted REITs do not trade in the seconday markets....and shares must be redeemed only through the issuer.
| Valuethinker wrote: | The reason for the difference from an ETF or ordinary mutual fund is because the underlying assets are completely illiquid and are only bought and sold over a period of years. So a purchase or a sale of units which changes the number of units in issue cannot simply be reflected in the purchase of more underlying stocks or bonds.
The managers of the CEF or LLP could still use debt leverage to raise the NAV, and the risk profile, of the fund. Except for TIAA Real Estate annuity, most REIT managers (and private Limited Partnership managers) do do so. TIAA does this to a more limited extent. |
Listed REITs issue stock (and debt) to finance specific aquisitions. Its is usually very important that a new issue be accretive to the REITs cash flow, or, in my experience, the REIT share price will take a hit.
I do not know how unlisteds handle the trickle of unit sales...whether they bank them for future aquisitions, or how thats done. But new money is clearly not accretive, and may indeed be used to pay existing distributions to unitholders if the current net REIT cash flow is insufficient. This would be, as I mentioned above, ROC until there is no net capital...then it would be Ponziville.
BruceM |
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BruceM
Joined: 08 Aug 2008
Posts: 1078
Location: Manzanita, Oregon
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| Posted: Sat Apr 17, 2010 12:38 pm Post subject: Re: Heathcare Trust of America |
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| Debbie wrote: | | Any thoughts on Healthcare Trust of America? |
Debbie
HCT looks like other unlisted REITs I've looked at.
Redemptions are limited to 5%/yr and may be suspended by the company. There are surrender charges if shares are redeemed within the fisrt 4 years.
But the real measure is in the distribution rate and tax character of the distributions....something I can't seem to find on the web site, and I suspect is not findable for a reason.
I would steer clear of any unlisted REIT...but just for grins, you should e-mail HCT and ask for the following information:
1. A history of distributions from beginning to the most recent
2. The tax character of the distributions
The most recent announcement was a 7.5% annualized distribution, which kind of sounds like it hasn't changed since inception. But I'd be willing to bet this distribution is largely return of capital....although I could always be surprised and it could be primarily earnings....but I doubt it.
http://www.htareit.com/
BruceM |
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