Non-traded REIT Comparison

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Blarney
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Non-traded REIT Comparison

Post by Blarney » Fri Mar 28, 2008 3:58 pm

Hey all, I'm new to the forum and was wondering if anyone knew of a comparison chart of non-traded REIT's. I'd appreciate any help.

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stratton
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Re: Non-traded REIT Comparison

Post by stratton » Fri Mar 28, 2008 4:40 pm

Blarney wrote:Hey all, I'm new to the forum and was wondering if anyone knew of a comparison chart of non-traded REIT's. I'd appreciate any help.
Don't bother. Non-traded REITs are a product meant to be sold and not bought. I had the Harvard Behringer non-traded REIT "offered" to me that had a 7% guaranteed yield. Little details like 7% load, 1% 12b-1 fee, ~1% expense ratio, you can't sell it for much and only a small percentage a year can redeem and they were paying the dividend out of new investors cash because they didn't own any property at the time. I understand they've bought some nice stuff now.

To quote myself from another thread:
stratton wrote:
I can find very little information on these types of REITS (except of course through brokers who pump up all of the benefits,) and I have been trying to make the case to my mother to take her losses and run.
Ralph Blocks Investing in REITS: Real Estate Investment Trusts I believe has a comment about not investing in private REITs for reasons mentions above. Conversely Ray Lucia likes them.

Here's an article on private REITs from the NYT questioning them as investments.

Forbes has an article on private REITs from Sept 2003:
Are these good investments? Not really (see table). Private REITs keep their share prices frozen, meaning there's no possibility of appreciation. If, for instance, you buy a hotel-REIT share from Apple Suites Realty at $10, this company will give you $10 back. Private REITs are pretty liberal with the fees siphoned off for insiders. And there is scant prospect of a hostile tender offer to rescue the shareholders of a mismanaged private REIT.
...
Like many financial products, this one needs heavy marketing to succeed. "Private REIT shares are sold, not bought," says Jon A. Fosheim, cofounder of real estate research firm Green Street Advisors. Mirroring its peers, Wells REIT depends on an army of salesfolk--39 affiliated brokers and 3,000 independent reps--whom Wells' executives pump up at annual conferences.
...
Stagnant stock. Wells' REIT's big pitch is that no investor has lost money with the trust. True, if you ignore opportunity cost. The share price has been fixed at $10 since 1998. Since then the four most widely held publicly traded office REITs have averaged 5.4% yearly in price gains. Add in their dividends and the return was 11.5%, outpacing Wells' 7% dividend-only return.

If you want to redeem your Wells shares, you may have to stand in line. The REIT has committed to cash out (at the full $10) up to 3% of its shares every year. So far redemption orders have been modest and last year's $21 million of cash-outs came to only 1.75% of the stock then outstanding. But if there were a rush for the exits--say, after a big cut in the dividend--the redemptions would be first come, first served, and it might take a long, long time to unwind a position.
Paul

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Post by InvestingMom » Fri Mar 28, 2008 7:27 pm

Please listen to Straton. I don't think his reply was originally to me, but it could have been. My mother was also talked into one of these with Wells Capital. One chunk for her taxable account, which was completely inappropriate, and one for her IRA. Just this month I was finally able to redeem both of them (after my mom already paid a 10% commission up front and then a 9% early redemption penalty).

I looked and looked for information, but of course it is not available because the company's are not publicly traded. From what I could ascertain they do have to file financial statements with the SEC but good luck trying to read them. Bottom line is that they are not publicly traded and so there really is no comparison. Perhaps you could analyze one that has eventually gone public to see if the returns ended up being any good. But as the Forbes' article indicates there is no guarantee that they will redeem the shares as they have the right (at least Wells does) to discontinue redemptions.

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stratton
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Post by stratton » Fri Mar 28, 2008 7:42 pm

InvestingMom wrote:Please listen to Straton. I don't think his reply was originally to me, but it could have been. My mother was also talked into one of these with Wells Capital. One chunk for her taxable account, which was completely inappropriate, and one for her IRA. Just this month I was finally able to redeem both of them (after my mom already paid a 10% commission up front and then a 9% early redemption penalty).
Thats even worse than I thought. How long, if ever, before the early redemption penalty ran out?

Paul

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alec
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Post by alec » Fri Mar 28, 2008 8:17 pm


InvestingMom
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Post by InvestingMom » Fri Apr 04, 2008 2:49 pm

stratton wrote:
InvestingMom wrote:Please listen to Straton. I don't think his reply was originally to me, but it could have been. My mother was also talked into one of these with Wells Capital. One chunk for her taxable account, which was completely inappropriate, and one for her IRA. Just this month I was finally able to redeem both of them (after my mom already paid a 10% commission up front and then a 9% early redemption penalty).
Thats even worse than I thought. How long, if ever, before the early redemption penalty ran out?

Paul
3 years after their offering period and then 5%. I think the offering period was expected to last for 2 years. The only way to really get your money out was to wait for the thing to go public which as I recall was expected in 7 years. As I mentioned above, they could change their redemption policy, including suspending redemptions at any time with very little notice. That was enough for me to say lets get the money out and run.

Cody
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So what to do

Post by Cody » Fri Apr 04, 2008 5:23 pm

I am just sick because I have two Private Reits (Wells II and Hines)

Wells is a 9% surrender and Hines is 5%.

What would be the positive and negative things of selling now?

IE - In two years (2010) my wife retires and I am already retired. Should I wait until then to cash out for tax purposes?

God I'd love to get out.

PS - I dropped the Financial advisor and now have a 4 Pillar Portfolio.

Cody

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Re: So what to do

Post by InvestingMom » Mon Apr 07, 2008 12:33 pm

Cody wrote:I am just sick because I have two Private Reits (Wells II and Hines)

Wells is a 9% surrender and Hines is 5%.

What would be the positive and negative things of selling now?

IE - In two years (2010) my wife retires and I am already retired. Should I wait until then to cash out for tax purposes?

God I'd love to get out.

PS - I dropped the Financial advisor and now have a 4 Pillar Portfolio.

Cody
Cody,
Here is my 2 cents...
Don't beat yourself up these might not end up being bad investments. Besides you could have lost more in the regular markets including the traded Reits.
I don't know anything about Hines but here are some things to think about regarding the Wells reit.
  • Are you concerned about the liquidity? My biggest concern was that management could discontinue redemptions at any time. For me this was a big negative. One thing you might do is find out when the offering period ends because at that point I believe the redemption penalty is 5%.

    Are these invested in a tax deferred account such as an IRA or 401K? If so then the tax consequences are not as much of a concern.

    Obviously the markets have done very poorly for the last year, especially Reits. If you sell, then you are only out 9% less the dividends. In comparison you have not done that badly. I would consider reinvesting the money in the Vanguard Reit index fund...if that is part of your asset allocation plan.
Good luck,
IM

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Post by Levett » Mon Apr 07, 2008 2:06 pm

Cody--

Please don't consider this piling on. I just want to call your attention to something that might help you decide whether to cash out now or later.

David Swensen, the chief investment officer of the very successfull Yale Endowment, singles out Wells in his book, Unconventional Success (pages 70-75). Swensen knows a thing or two about real estate investments, and he doesn't pull any punches about Wells.

Among a number of things said, Swensen observes:

"No rational buyer can compete with the Wells acquisition machine's willingness to overpay for product. As a consequence, investors suffer the double indignity of high fees and poor investment prospects. The leading actor on the commercial real estate stage struck a powerful villain's pose."

Bob U.

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Re: So what to do

Post by Valuethinker » Tue Apr 08, 2008 2:37 am

Cody wrote:I am just sick because I have two Private Reits (Wells II and Hines)

Wells is a 9% surrender and Hines is 5%.

What would be the positive and negative things of selling now?

IE - In two years (2010) my wife retires and I am already retired. Should I wait until then to cash out for tax purposes?

God I'd love to get out.

PS - I dropped the Financial advisor and now have a 4 Pillar Portfolio.

Cody
HUGE CAVEAT: i DON'T KNOW YOUR WHOLE SITUATION. CAVEAT EMPTOR ON WHAT I WRITE BELOW

Positives

- REITs are in free fall. Private REITs may not yet have caught up

- you get your cash, and a chance to reinvest it

Negatives

- tax - but are the costs/ losses allowable for tax? Then a higher tax rate now is a good thing (losses worth more)
- do the withdrawal fees fall over time?

My own view:

Pain is always better taken sooner than later. But tax is a big factor.

It also depends on what is in the products: are they conservatively invested in blue chip office and apartment properties (a la TIAA RE annuity?) or do they have more risky investments: leisure, hotels and retail tend to be riskier forms of commercial RE exposure. How geared (leveraged) are they? Do the managers have a long term conservative track record?

Quantify the tax pain. If it's 5% of the total investment, I'd probably take it. If it's 25%, I'd probably wait.

Alot depends on what fraction of your retirement wealth this all is.

But generally in investing, it is wise to take pain up front and early. This is also true in life: psychologically you are less 'invested' in a bad decision like buying the wrong car, or marrying the wrong person, the less time you have spent in that relationship.

Studies show ('behavioural finance'/ prospect theory) that humans are twice as averse to taking pain as they are to making a gain. So we tend to 'run our losers, and sell our winners' whereas success is about 'selling the losers, and riding the winners'.

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Post by Valuethinker » Tue Apr 08, 2008 2:38 am

bob u. wrote:Cody--

Please don't consider this piling on. I just want to call your attention to something that might help you decide whether to cash out now or later.

David Swensen, the chief investment officer of the very successfull Yale Endowment, singles out Wells in his book, Unconventional Success (pages 70-75). Swensen knows a thing or two about real estate investments, and he doesn't pull any punches about Wells.

Among a number of things said, Swensen observes:

"No rational buyer can compete with the Wells acquisition machine's willingness to overpay for product. As a consequence, investors suffer the double indignity of high fees and poor investment prospects. The leading actor on the commercial real estate stage struck a powerful villain's pose."

Bob U.
PS based on this comment, Cody should sell his Wells product with undue haste.

The reason being the US commercial RE market is headed down, almost for sure, and someone like Wells takes a disproportionate amount of the pain on the way.

This all assumes nothing has changed in Wells since Swensen wrote that in 2002?

Cody
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Thanks for your thoughts

Post by Cody » Tue Apr 08, 2008 8:18 am

My Private Reits are 1/7 of my retirement portfolio.

They are in taxable accounts. (Of course -) :cry:

They spin off $2000/yr. dividends.

Thanks,
Cody

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Post by InvestingMom » Tue Apr 08, 2008 12:13 pm

One thing you should do immediately if you have not done this already is make sure the dividends are not being reinvested. Of course I would redeem the whole thing...but at a minimum get your dividends out.

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Re: Thanks for your thoughts

Post by Valuethinker » Tue Apr 08, 2008 3:41 pm

Cody wrote:My Private Reits are 1/7 of my retirement portfolio.

They are in taxable accounts. (Of course -) :cry:

They spin off $2000/yr. dividends.

Thanks,
Cody
When faced with a difficult and indeterminate problem, minimise regret.

Maybe cash in 1/4th now, and then the rest when your tax position changes?

If there is a subsequent bad problem you at least pulled some money out.

If we are panicking you unecessarily, then you haven't cost yourself more than the cashing in costs of 1/28th of your portfolio.

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stratton
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Post by stratton » Tue Apr 08, 2008 3:54 pm

You may be restricted to a limited redemption percentage of your original investment. One of the articles I read said 20% was typical. That makes the amount to redeem decision each year easy.

Paul

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