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Tuesday, 12 March 2013

Non-Traded REITs Poised for Unprecedented Wave of Liquidity Events

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Commercial Real Estate Direct Staff Report

Non-traded REITs could complete liquidity events resulting in an unprecedented $39 billion of transaction volume this year.

Five such REITs have already made moves to merge or list their shares on major exchanges. And they're expected to be joined by at least five other companies.

The latest company to move to an exchange listing was Cole Credit Property Trust III Inc., which last week struck a deal to buy its manager in preparation for a listing of its shares. The company has raised $4.8 billion of equity through the sale of its common shares and owns 968 properties, most of which are net leased to their tenants. It carries the properties on its books at a value of $7.2 billion.

Non-traded REITs are illiquid entities by nature. Sponsors raise capital by selling shares, typically for $10 each, through public offerings that often last more than two years. The sponsors, who earn hefty fees for raising capital and investing capital, then buy properties, or originate mortgages, and pay dividends to their investors, who are restricted from selling their shares. But they promise their investors that they'll provide them a liquidity event, allowing them to monetize their investments, after a certain period of time.

"There's life after being a non-traded REIT," said Nicholas Schorsch, head of AR Capital, the most-active sponsor of non-traded REITs. Two of the REITs that AR Capital has sponsored have completed liquidity events in recent months.

Its American Realty Capital Properties Inc., which had raised capital through an exchange-listed stock offering only two years ago, bought American Realty Capital Trust III Inc., in a $2.2 billion deal, giving shareholders in that non-traded REIT liquidity. And its flagship American Realty Capital Trust Inc. earlier this year was acquired by Realty Income Corp. in a $3 billion transaction.

In addition, Healthcare Trust of America Inc., which was launched by Grubb & Ellis in 2006, but more recently was advised by AR Capital, last year listed its shares on the Big Board. Its shares are trading at $11.80 each, up 18 percent from the $9.97 they traded at when they were listed last June.

A total of 92 non-traded REITs were launched since 2002, with an overall capital-raising target of $184.5 billion. But relatively few have undergone liquidity events. That's about to change as a growing number of non-traded REITs are reaching the time by which they told their investors they'd be executing liquidity events. Meanwhile, market conditions are ripe. If stock prices on major exchanges are on the upswing, it's easier for sponsors of non-traded REITs to sell. Prices of REIT shares are up nearly 15 percent over the past year.

And share prices for non-traded REITs that listed their shares recently are doing even better. Retail Properties of America Inc., which was known as Inland Western Retail Real Estate Trust Inc., before it listed its shares in February 2011, has seen its share price nearly double to $14.90.

"The smart guys will do this during a time of good market conditions," explained Keith Allaire, managing director of Robert A. Stanger & Co., an investment bank that tracks the REIT market.

Besides Cole Credit III, the four other companies that have said they'd list their shares or otherwise complete liquidity events this year are Wells REIT II Inc., which had raised $6 billion when it stopped selling shares in 2010 and this month changed its name to Columbia Property Trust as part of an effort to complete a liquidity event; Inland Diversified Real Estate Trust Inc., which has raised $1.1 billion and last month said it has started talks with investment banks that would help it complete a liquidity event; Apple REIT Six Inc., which raised $902 million of capital, struck a deal to be acquired by Blackstone Real Estate Partners VII in a $1.1 billion deal; and Cole Credit Property Trust II Inc. in January agreed to merge with Spirit Realty Capital Inc., in a deal with an equity value of $1.5 billion.

The thinking is that at least five other non-traded REITs are in a position to execute liquidity events sometime this year.

Those include:

- Inland American Real Estate Trust Inc., perhaps the biggest non-traded REIT extant, has raised more than $8.7 billion and owns a diverse portfolio of 887 hotel, retail, industrial and apartment properties.

The company, which carries $6 billion of debt, nearly $1 billion of which comes due this year, has been refocusing its portfolio to concentrate on premium hotels, retail and student-housing properties. In a recent presentation, the company said it continued to work with its investment banks to evaluate its liquidity options and said the timing of any event would be dictated by market conditions.

- CNL Lifestyle Inc., which had raised $3.2 billion through early 2011 and owns 170 properties that include ski resorts, golf courses and senior-living facilities. When it first filed to raise capital in 2003, it had proposed completing a liquidity event by the end of 2015.

- Behringer Harvard REIT I, the grand-daddy of the non-traded REIT sector, was launched in 2002 and had raised a total of $2.9 billion of capital. It owns 50 office properties with 20.2 million sf that are encumbered by $2.1 billion of debt. Late last year, it internalized its management, which usually portends a liquidity event.

- Chambers Street Properties, which last year changed its name from CBRE Realty Trust. It raised $2.6 billion of capital and owns 45 office and industrial properties with 13.9 million sf in 10 states and the United Kingdom. It also holds an interest in CBRE Strategic Partners Asia II LP.

It initially was scheduled to undergo a liquidity event in 2011, but after reviewing market conditions at the time, its board decided to postpone such a move. With REIT shares at the levels they are today, the buzz is the company would likely move forward with an event this year. Its name change is widely seen as the first step in that process.

- Apple REIT Nine Inc., which was launched in 2007, raised $2 billion in a capital-raising effort that was completed in 2010. It owns 89 hotels with 11,371 rooms in 27 states. When it started offering shares, it had projected completing a liquidity event within seven years after it completed its stock offering. The Apple REIT companies are led by Glade M. Knight, who is among the most successful in executing liquidity events for REIT's he's sponsored.

He had founded Cornerstone Realty Income Trust and sold that publicly traded REIT in 2004 to Colonial Properties Trust. And in 2007, at arguably the last market peak, he orchestrated the $877 million sale of Apple REIT Two to ING Clarion Partners and the $709 million sale of Apple REIT Five to Inland American Real Estate Trust.

Comments? E-mail Orest Mandzy, or call him at (267) 247-0112, Ext. 211.

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