Non-Traded REIT

A Non-traded REIT (real estate investment trust) is a certified real estate investment trust duly registered with the Securities Exchange Commission but is not listed on an exchange for public trading. Thus, it aims at providing retail investors (accredited) to invest in inaccessible real estate products along with certain tax benefits.

Non-traded REITs are required by the SEC to file regular reports and follow regulatory compliance. Also, they need to fulfill all the IRS requirements for REITs, like returning a minimum of 90% of taxable income to the stakeholders or investors. Although, such investment involves high risk compared to the publicly traded REIT.

• A non-traded REIT is a real estate investment registered with the Securities and Exchange Commission (SEC). Still, it is not available for public trading on any major exchange.
• The issuing companies must comply, periodically file reports with the SEC, and meet the Internal Revenue Service (IRS) requirements.
• Registered broker-dealers and financial advisors sell such investments to accredited retail investors.
• The PNLRs often lack transparency and liquidity. Hence, these are high-risk and expensive investment vehicles that offer higher-than-average returns when compared to other securities.

Non-traded REITs or public non-listed REITs (PNLRs) are those real estate investment vehicles that are not publicly available for trading on a stock exchange. Thus, these non-traded real estate investment trusts own, operate and manage income-yielding properties and assets like commercial buildings, warehouses, shopping malls, apartments, etc. Moreover, the companies issuing such securities.

Hence, the Securities and Exchange Commission (SEC) requires them to register and file periodic reports. Also, these investment products follow the same set of Internal Revenue Service (IRS) rules as the other REITs. Moreover, the offering documents and prospectus of the REIT should disclose the commission structure for non-traded REITs. Hence, investors can expect to encounter a standard type of commission and fees associated with these investments.

• Upfront sales commission: When an investor purchases shares of a non-traded REIT, a portion of the investment amount is often allocated as an upfront sales commission.
• Dealer manager fee: This fee is paid to the broker-dealer or financial advisor acting as the dealer manager for the REIT.

Unlike publicly-traded REITs, which list on stock exchanges and trade like stocks, investors lack a readily available market to buy or sell these PNLRs. Instead, broker-dealers or financial advisors sell and promote public non-traded REITs. As a consequence, financial market participants consider such investments to be illiquid. This lack of liquidity makes it challenging for investors to sell their shares before a predetermined liquidity event occurs.

However, there has been some development in recent years in creating limited secondary markets for non–traded REIT shares. Additionally, these unlisted REITs may distribute dividends to their shareholders regularly. Thus, dividends from non-traded REITs are often generated from the rental income and are collected from the properties owned by the REIT.

Let us understand the concept better with the help of an example.

Example #1

Suppose Hawthorn Hospitality Trust focuses on acquiring and managing hotel properties in popular tourist destinations across the United States. Besides, the REIT aims to generate income and potential capital appreciation through hotel operations and strategic property management.

Here are some critical details about the hypothetical Hawthorn Trust:

• Investment Strategy:  The Trust invests in full-service hotels, boutique hotels, and resorts. The REIT targets properties in popular tourist destinations with high occupancy rates, strong demand, and potential for future growth.
• Geographic Focus: The REIT focuses on acquiring hotel properties in key tourist destinations across the United States, such as beachfront locations, major cities, or areas known for their natural attractions. Specific locations may include coastal regions, urban centers, or areas near national parks.
• Property Management: The Trust employs an experienced management team that oversees the day-to-day operations of the hotel properties in its portfolio. Moreover, the group focuses on delivering exceptional guest experiences, maintaining high-quality standards, and maximizing revenue potential through effective marketing and operational strategies.

Therefore, Potential investors in this would typically have the opportunity to purchase shares through a private placement. Hence, financial advisors or broker-dealers often facilitate them.

Example #2

Redeem requests from non-traded U.S. real estate income trusts (REITs) have reached an all-time high, pushing private equity companies to put restrictions in place to prevent withdrawals.

Blackstone Inc, Starwood Capital Group, and KKR & Co Inc announced that they will ban investors from redeeming their holdings. Therefore, anytime such withdrawals reach a predefined 5% of the total quarterly assets of the REITs.

According to real estate consultancy firm Robert A. Stanger & Company, the number of such redemptions across U.S. non-traded REITs surged to $12.2 billion in 2022. Therefore, an increase of eight times the $1.5 billion made by investors the year before.

Therefore, the increase in repayments coincides with a recent divergence in returns between privately held REITs and their publicly traded equivalents.

Pros

• More than Average Returns: Such investment products comprise income-generating real estates like commercial buildings, offices, malls, warehouses, apartments, etc., which yield high returns for the investors in the form of rent, lease, or mortgage.
• Inflation Hedge: Since the returns from such investments are considerable and keep increasing, it efficiently beats the rising inflation rates.
• Periodic dividends: The PNLRs offer regular dividend payouts to the investors or shareholders until liquidation, which is a plus for them.
• Diversification: Another key benefit is its ability to diversify the investor's portfolio when the other assets are highly volatile to the market swings.
• Different Ways of Liquidation: The companies can liquidate their assets in numerous ways, such as selling off the properties wholly or partially or merging with another company to convert into an exchange-traded REIT.

Cons

• Illiquidity: Since such REITs do not have a listing in the secondary market like a stock exchange for trading, shareholders cannot sell their holdings immediately in case of an urgent fund requirement.
• Complex and Uncertain Valuation: These securities do not have a listing for trading on any exchange, thus the public does not have ready access to their actual market value, and it is not possible to determine their precise value.
• No Guarantee of Distributions: The dividend yields of such investments are though high but often uncertain.
• Risky: The underlying assets of such an investment vehicle are not easily traceable. Also, it is difficult to determine the exact market value of these securities, which increases the risk of loss for the investors.
• Excessive Front-End Fees: The companies issuing such REITs spend a significant amount on the marketing and compensation of the broker-dealer and financial advisors, which result in high front-end fees charged from the investors.

Non-Traded, Private, and Interval Fund do not have a listing for public trading. Therefore, they lack liquidity and transparency. However, there are various distinctions between them, as discussed below:

Although the SEC requires both non-traded and publicly traded REITs to register, they differ significantly in the following ways.:

This article has been a guide to what is Non-Traded REIT. Here, we compare it with private and traded REIT and interval fund, explain its examples, pros, and cons. You may also find some useful articles here -

• Office REITs
• Retail REITs
• Industrial REITs