NNN Lease Market News
Industry executives say these new nontraded REITswill do a better job of giving investors a way to invest in real estate without
the volatility of exchange-traded REITs, which have assets of roughly $500
billion. Like existing nontraded REITs, the new ones are offering attractive
initial dividends, such as American Realty Capital's nearly 7% distribution and
Cole Real Estate's 5.5% distribution.
But these new structures haven't completely silenced
critics, who point out that some fees remain high and investors might still
face redemption problems.
Jim Sullivan, a managing director at REIT research
firm Green Street Advisors, says investors are still better off investing in a
publicly traded REIT. "They are more liquid, they are more transparent and
the market tells you every day what they're worth," he says.
Traded REITs, like nontraded ones, are required to
pay at least 90% of their taxable income in the form of dividends. But unlike
nontraded REITs, traded REITs' values are set throughout the trading day,
giving investors instant transparency.
Nontraded REITs first became popular a decade ago.
The pitch: Long-term investors would hold them for seven to 10 years, during
which time they would collect attractive dividends. Then the REITs would sell
their properties or go public, returning to investors their principal plus any
gains. The trade-off was that redemptions would be limited during the lives of
the REITs.
But fees were high—as much as 11% in initial sales
charges. And only 19 of about 90 have returned investors' principal over the
years.
“A
dividend that high indicates the market doesn’t believe that dividend is
sustainable.
Yields
in the 20s and 30s (and higher) often reflect a view by the market that this
dividend
is likely to be cut. When investors get jittery about a REIT’s ability to cover
its
dividend, they tend to sell shares, which causes the yields to jump. Some REITs
have
suspended their dividends, while others have either trimmed them or opted to
pay a
portion of them in stock.” BradThomas.
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