Closed nonlisted REITs still suffering financial crisis hangover

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Closed nonlisted REITs still suffering financial crisis hangover

A review of second-quarter performances of nonlisted REITs

Aug 31, 2014 @ 12:01 am

By Michael Stubben

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While certain recently closed nonlisted REITs, such as Industrial Income, Griffin-American Healthcare REIT II, Cole Credit Property Trust IV and Corporate Property Associates 17 Global have shown strong operating performance throughout their history, the majority of closed nonlisted REITs have seen significant negative impacts to their real estate operations.

Both the commercial real estate capital markets pricing bubble (2006-08) and the commercial real estate property market recessionary phase (2008-10) have led to a widespread and significant decrease in distributions and valuations among closed nonlisted REITs.

Non-listed REITs that took on short-term debt risk, overleveraged, or invested in high risk alternative assets suffered more severe declines and losses. As a result of the market adjustments, the reported market values of their assets have declined, and these closed nonlisted REITs have experienced declines in occupancies and rents.

While some REITs will see further improvements in 2014, many REITs will continue to face distribution and valuation issues due to operational challenges and debt maturities. In 2013 & 2014, several closed non-listed REITs listed on the stock exchange or were sold to publicly traded REITs, including Inland Diversified, Cole Credit Property Trust II, Cole Credit Property Trust III, and Columbia Property Trust, formerly known as Wells REIT II.

Open nonlisted REITs enjoy 9% gain in fundraising

The top 20 nonlisted REITs raised $4.4 billion in the second quarter, which represented over 95% of all nonlisted-REIT fundraising.

Fundraising in the second quarter increased 9% from the first quarter, largely due to the close of ARC Global Trust, ARC Healthcare Trust II, and Carter Validus Mission Critical REIT, each of which acquired over $500 million.

Net lease REITs continue to dominate fundraising in the non-listed REIT space led by programs such as ARC Global Trust, Carter Validus Mission Critical REIT, Corporate Property Associates 18 Global, and Griffin Capital Essential Asset REIT, which are four of the top five fundraisers.

Funds from operation payout ratio is an important non-listed REIT performance metric established by the National Association of Real Esate Investment Trusts that serves as an industry-standard for publicly listed REITs. While FFO is an accrual metric that includes some non-cash components such as straight-line rent, FFO payout ratio provides important insights into distribution sustainability. Nonlisted REITs should have a FFO payout ratio below 100%, as they deploy their equity capital and build up their portfolios.

Michael Stubben is the president of MTS Research Advisors.

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