One type of real-estate investment trust is not traded on a exchange but once held the promise of steady dividends. In the years leading up to the downturn, a number of investors put their money into this special type of trust.
Investors are starting to see the downsides of these trusts as some REITs are attempting to go public and others are being pressured by regulators to provide more disclosure on their value. The issue is that some of the non-traded REITs are being valued at prices much lower than what investors expected.
Earlier this month, one large holder of retail properties and shopping centers converted from a non-traded REIT to a publicly traded company. After a reverse stock split, its investors were surprised to learn that their shares’ value dropped by more than half.
A large portion of these REITs were created during the housing boom, raising more than $70 billion, largely from individual investors. The trusts were being touted by financial advisers as a way to profit from real-estate without the volatility of REITs that are publicly traded. High dividend yields were also seen as a draw, payments up to 7%.
However, whereas stocks that are publicly traded are valued based on the marketplace, methods for valuing non traded REITs aren’t so consistent. Property values are often assessed by investment banks or outside appraisers.
Partly the result of regulatory pressure from the SEC and Finra, a number of non traded REITs are providing more disclosure of how they arrived at their valuations, growth rates, and other investment metrics. Investors aren’t too happy to abort what is being disclosed, as many feel they were misled about the safety of their investments.