Commercial Real Estate Direct Staff Report
The departure of AR Global Investments from the non-traded REIT world, coupled with uncertainty surrounding a substantial pending regulation, has put a big damper on the sector's ability to raise capital.
Last year, only $4.8 billion of equity was raised by sponsors of 35 entities, according to Summit Investment Research. That was the lowest volume in 14 years, according to the Gilbert, Ariz., research company, and compares with the $10.2 billion of equity that was raised in 2015.
Although the non-traded REIT sector has been in existence for more than 20 years - Wells Real Estate Funds launched what for a long time was its flagship REIT, Wells REIT Inc., in 1997 and W.P. Carey launched Corporate Property Associates well before then - it didn't move into high gear until the mid 2000s.
In 2004, $6.3 billion of equity was raised by companies such as Behringer Harvard, Cole Capital Corp., CNL Income Corp. and Hines. The companies each were taking advantage of improving real estate markets and a growing appetite among retail investors to put money into the sector.
Capital-raising, as a result, ballooned.
In 2007, the same year American Realty Capital Trust, which later became the industry's top dog, was formed by Nicholas S. Schorsch and William M. Kahane, $12.2 billion of equity was raised. Just about every major sponsor in the sector launched a non-traded REIT vehicle that year.
Then the capital markets collapsed. Equity-raising by sponsors of non-traded REITs started declining. In 2008, $10.4 billion was raised. That fell further, to $6.6 billion in 2009 as liquidity dried up.
Property values were on the decline and property owners were reeling, often as a result of having too much debt on their holdings. That prompted some opportunistic sponsors, like KBS Realty Advisors, NorthStar Realty Finance Corp. and Resource America Inc., to launch entities that would focus on the acquisition of debt.
American Realty also took advantage of the market turmoil, launching no fewer than five entities in 2010 and 2011. It was shooting to raise a total of some $7 billion of equity. Because sponsors of non-traded REITs customarily took sales commissions and other fees that totaled perhaps 10 percent or more of the amount raised, its take could have been substantial.
With market conditions recovering, American Realty started orchestrating a series of acquisitions and mergers, often using American Realty Capital Properties Inc., a publicly traded REIT that Schorsch had formed in 2011, as an aggregator. The idea was to provide liquidity to investors in previous entities and hope they'd invest in subsequent offerings. To make re-investment more enticing, American Realty formed companies with very specific focuses. It launched a company that pursued only properties in New York City, another that pursued hotels and another that pursued grocery-anchored shopping centers.
That feeding frenzy resulted in some $20 billion of equity being raised in 2013, the sector's high-watermark. American Realty, by then known as AR Capital, was responsible for more than one-third of that.
Michael Stubben, president of Summit, called that period, between 2012 and 2015, the ARC bubble.
AR Capital, now known as AR Global, is no longer actively raising capital for non-traded REITs, having quit the business in late 2015 because of pending regulations, namely the Department of Labor's fiduciary rule and the Financial Industry Regulatory Authority's notice 15-02. In addition, its flagship company, American Realty Capital Properties Inc., had disclosed an accounting irregularity in 2014 that resulted in the departure of its chief financial officer and chief accounting officer.
The fiduciary rule would make most financial advisers fiduciaries if they were selling financial products to a client's retirement account. And FINRA 15-02 requires sponsors of non-traded REITs to include estimated values of investors' holdings in their regular statements.
The fiduciary rule's implementation has been postponed and could very well be overturned. That uncertainty is sure to continue having an impact on the sector. So capital-raising for the non-traded REIT sector could very well remain subdued this year. That is, unless the uncertainty is resolved.
Meanwhile, Blackstone Group, which launched a non-traded REIT only last August, was the top capital-raiser in the sector during the fourth quarter, with $279 million. It was followed by JLL Income Property Trust, which is celebrating its fifth year in existence, with $153 million. And Industrial Property Trust, sponsored by Dividend Capital Trust of Denver, raised $129 million.
For the year, JLL Income Property was the top dog, with $565 million of capital raised, or 11 percent of the year's total for the sector. Industrial Property was just behind it with $535 million, followed by Griffin Capital Essential Asset REIT II Inc., which raised $419 million. Griffin Capital Essential is sponsored by Griffin Capital Corp. of El Segundo, Calif., which has sponsored non-traded REITs since the mid-1990s.
Comments? E-mail Orest Mandzy, or call him at (267) 247-0112, Ext. 211.
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