Commercial Real Estate Direct Staff Report

Wells Real Estate Funds is launching another non-traded REIT and has set an equity-raising target of $5.7 billion, among the biggest targets ever for such an entity.

While the entity, Wells REIT III, is targeting to raise $5.7 billion, which would include capital raised through a dividend reinvestment program, there's no guarantee that the company would ever raise that much.

For instance, its predecessor, Wells REIT II, was launched in 2003. It had a total target of $12.8 billion. Through the beginning of last month, it had raised a total of $5.2 billion. Capital is raised through broker-dealers who sell shares to individual investors for $10 apiece.

The number of non-traded REITs in registration or actually being sold to investors has blossomed during the past two years. This year alone, 16 REITs, including Wells REIT III, have been registered with the SEC and are aiming to raise a total of $30.4 billion. Last year, nine were registered to raise $18 billion.

This year's total includes three entities designed to pursue investments in debt instruments. The others have property-centric investment strategies and are looking to take advantage of the continued capital crunch by buying properties at depressed pricing levels.

A slew of traded REITs had also registered to raise capital. The first out of the gate, Starwood Property Trust Inc., was well over-subscribed and managed to raise some $950 million, nearly double its target. Subsequent offerings were either halved in size or postponed as the traded markets soured on the idea of investing in blind pools.

It's still too early to say whether investors have likewise soured on non-traded REITs. But given that three fresh REITs have registered over the past three weeks alone, sponsors of the vehicles believe there's still plenty of investor interest.

Wells REIT III will target high-quality office properties as well as industrial buildings. The company, never a big user of debt to finance its investments, conceded that current capital market conditions might force it to completely eschew the use of debt to leverage its investments.

That investment strategy is similar to that of other Wells investment vehicles. And the company acknowledges that it could face conflicts in identifying programs for individual investments and tenants for properties.

Wells Real Estate is among the most experienced investment managers in the non-traded space, having raised $11 billion of equity for 19 vehicles from 265,000 investors. Each of its vehicles started life as a blind pool - essentially a barrel of investor capital - that it then has to parlay into properties that generate sufficient cash flow to pay dividends.

Investors in non-traded REITs give up their liquidity in exchange for the promise of regular dividends that often are heftier than those paid by traded REITs and a pay out in the future. In the case of Wells REIT III, that pay out would come in 2020, when a liquidity event, either a listing of its shares on an exchange or a liquidation, would be triggered.

While it doesn't promise any specific dividend, Wells REIT said it aims to pay regular distributions, preserve capital and return it eventually and provide its investors with profits from the ultimate sale of properties or a liquidity event.

Investors face substantial costs: an affiliate of Wells Real Estate gets a 7 percent sales commission and 2.5 percent dealer-manager fee. In total, only $8.65-$8.81 of every $10 invested actually goes into real estate. The rest goes to pay sundry fees and costs of running the REIT and raising its capital.

Comments? E-mail Orest Mandzy or call him at (215) 504-2860, Ext. 211.