By Carl Gaines | New York
NEW YORK CITY-At the start of Wednesday’s RealShare Net Lease conference, keynote speaker Thomas Sittema, CEO of CNL Financial Group, produced a chart showing just four non-traded REITs as of 2003, compared to about three dozen today. An afternoon panel, aptly titled "The Rise in Popularity of Non-Traded REITs" and moderated by Calkain Cos. president and CEO Jonathan Hipp, helped explain this growth: the non-traded vehicles offer several benefits to investors who might remain hesitant about riskier, higher return investments. These include shelter from the volatility of the public markets and a steady cash flow that might prove attractive to those wanting to supplement their retirement.
Jonathan W. Hipp at
RealShare Net Lease 2011
Panelists focused initially on parsing the significance of the phase "non-traded," with some taking exception to the common assumptions it might cause. Don Henry, chief real estate officer at Wells Real Estate, said that he believes that it's a misnomer&emdash;one that leaves the impression that there is a lack of oversight within the industry.
"It's easy to go into the 10Ks and 10Qs," he said, referencing quarterly financial documents. "You can go to these and see if the dividend's being covered."
These dividends, and a REIT's possession of the cash flow to distribute them, came up several times. "For us it's always about cash flow," said JoAnn Armenta, president and CEO of Inland Diversified Real Estate Services. "Cash flow is key, so we want to know if the property puts out enough cash to cover distributions."
Also key to the sector, according to panelists, is caution. Several emphasized the caution it takes to select a non-traded REIT that will yield a steady, albeit moderate, return. "You have to have a little cushion in your deals," Armenta said, "because bad things do happen."
Those "bad things," however, pale in comparison to the devastation that can occur when investments are subjected to the public markets. "Non-traded REITs’ equity-raising activities in this sector went down 30%," said panelist Sterling Champ, referencing the economic downturn. Champ, an EVP at CB Richard Ellis, added that the equity-raising activities of publicly traded investment vehicles went down much more.
Overall, panelists seemed optimistic regarding non-traded REITs, and statistics that Champ shared with the approximately 250 in attendance made clear why. "$8.4 billion was raised in 2010 by sponsors in the industry," Champ said. He added that 85 percent of the total equity raised in the sector was raised by the top 10 sponsors and that he sees current opportunities to exist primarily in smaller, niche markets, since the exceptional deals are already being chased by a lot of capital.
So for investors looking for safer, more conservative returns on real estate investments, the future holds happy hunting for the foreseeable future. "My feeling is that the growth we've seen over the past couple of years is probably going to continue," Champ said. "But investors have to go deeper into the haystack."
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