For advisers whose clients may be invested in any of the some six dozen nontraded real estate investment trusts, here's something in the category of “it's about time”: liquidity.
Central Trade & Transfer LLC, which launched an eBay-style online auction site in January, wants to create a buying-and-selling environment for illiquid nontraded REITs.
“We call ourselves the secondary market 2.0,” said Greg Paul, founder and chief executive of CTTAuctions.com.
By design and as a result of market forces, nontraded REITs — which have taken in more than $70 billion over the past decade and $8.5 billion last year alone — have come to epitomize illiquidity. Most are designed as pools of capital leveraged to purchase real estate and pay out the income in the form of dividends.
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The traditional life of a nontraded REIT is between eight and 12 years, which is the time from creation to capital raising to a final liquidity event in which the REIT either goes public by listing on an exchange or liquidates its underlying real estate portfolio.
For investors who are attracted to the investment because of its steady dividend income, the lack of liquidity has become a real issue.
“Right now, 80% of the programs out there are no longer offering redemptions, and there are quite a few investors wanting out,” Mr. Paul said.
Over the past two years, less than $35 million of the more than $4 billion in investor redemption requests has been honored by the managers of the investment pools, he said.
This dearth of liquidity has spawned an eclectic but incomplete secondary market. About a half dozen firms list nontraded REITs that investors are looking to sell, providing a matching system comparable to a residential-real-estate listing service. Investors usually can find an exit through “minitender offers,” which come from firms that try to buy less than 5% of a REIT's shares with low-ball offers.
The secondary market has become the only way out for most investors, according to Spencer Jefferies, editor of Direct Investments Spectrum, a newsletter covering nontraded REITs and limited partnerships.
“In 2008, a lot of people wanted out and a lot of REITs just shut off the redemption programs,” he said.
By prospectus, most nontraded REITs limit redemptions to 5% of assets annually, which means that some investors may have to wait years for a chance to cash out.
“It's important to have a viable secondary market; otherwise, there are only the minitender offers, and a lot of those offers are very low,” Mr. Jefferies said.
In December, for example, investors in the Inland American Real Estate Investment Trust were offered $4 per share through a minitender offer from Lapis Investment Business Trust.
The offer was less than half of what Inland executives had paid to purchase shares of the REIT, according to Securities and Exchange Commission filings.
“Right now, there isn't really much of a secondary market for nontraded REITs,” said Vee Kimbrell, managing partner at Blue Vault Part ners, a research and education firm focused on nontraded REITs.
“The only source of cash for share redemptions is the reinvested dividends,” she said. “And unless you're a huge REIT, that's a problem.”
CTTAuction.com may not be perfect, but it allows for live and open bidding, as well as transparent pricing of shares on the secondary market. It is restricted to registered representatives and institutional buyers, and Mr. Paul is not willing to disclose a lot of details about the growth of the business so far.
The platform charges a 5% fee to the seller; Mr. Paul said advisers typically charge clients a 5% commission to buy shares of nontraded REITs on the platform.
When purchased directly, nontraded REITs usually charge commissions of between 8% and 10%.
“We understand these things are illiquid and we're not trying to create a New York Stock Exchange,” Mr. Paul said. “We're just a pressure release valve.”
Questions, observations, stock tips? Email Jeff Benjamin at jbenjamin@investmentnews.com
