Should Retirees Look At Non-Traded REITs For Income?

by: Aaron Katsman

It’s tangible, it’s solid, it’s beautiful. It’s artistic, from my standpoint, and I just love real estate. - Donald Trump

It’s no secret that in today’s low interest rate environment, retirees are having all kinds of trouble finding ways to generate enough income to meet their expense needs. It used to be that you could stick money into a government or a highly rated corporate bond and get a respectable return. Today, those same vehicles will generate virtually nothing. To get 3% on a corporate bond means that you will need to either investment for a very long term or take a lot more risk in the bond you choose.

I’ve written many columns extolling the virtues and risks associated with emerging market bonds, high dividend paying stocks and other income producing investments. Today I would like to focus on an asset that doesn’t get much attention, but just may deliver the income that you need.

Non-Traded REITs

There is a fourth asset class that hasn’t gained as much attention; commercial real estate. Most investors don’t have the wherewithal to go out and buy a shopping center. As such the thought of investing in commercial real estate doesn’t seem all that relevant. But now thanks to Non-Traded REITs (NTRs) individuals can gain exposure with reasonable investment minimums. NTRs are investments in real estate investment trusts that don’t trade on any stock exchange. Unlike, other publicly traded real estate, NTRs don’t come with the same fluctuation in principal that you find in other REITs. NTRs have become popular because of the high level of income that they distribute, usually in the 7% range. Many investors who want exposure to a beaten down U.S. real estate sector like NTRs because not only do they get a well diversified real estate portfolio with a big yield, but they also get potential for capital appreciation in the real estate held, and there are built in 2% annual rent increase, which gets passed through (mostly) to investors as well. NTRs are required to either liquidate or list their shares on an exchange within a specified period, usually at least seven years.

Downside?

NTRs may sound too good to be true. After all what can be bad about getting 7%, potential capital appreciation and no fluctuation in the share price? There are critics to NTR’s who like to point out the less rosy side of the asset. They point to very high fees paid by investors that ultimately bring down returns and the lack of transparency in pricing these assets. Just because there is no fluctuation in the share price doesn’t mean that the actual value of the instrument hasn’t moved, rather, it’s just that no one knows how to price it. NTRs are required to update their net asset value every year and a half after their offering, and if you look at their own reports to the S.E.C. you will find that the share prices have dropped well below their initial price.

Michael McTiernan, a lawyer for the S.E.C. told the NY Times,“One common sales tactic we object to is the suggestion that they are eliminating volatility simply because they don’t tell you what the value is. It’s not that it’s not volatile. It’s just that you don’t know.”

Firms like American Realty Capital and others have taken these criticisms to heart. In a recent article in Investment News Nicholas Schorsch, ARC CEO said, “We have to make this industry better. I’m a zealot about that. It has to be about pay for performance.”

More and more investors are investing in NTRs. In March alone ARC raised $1.5b in capital. This is an enormous sum for one firm in such a short time period, but it speaks volumes about 1- the investor thirst for income and 2- investors looking for capital appreciation in a U.S. real estate market that suffered mightily as a result of the sub-prime scandal.

NTRs are not for everyone but investors in search of yield should research them as they may provide a solution for today’s non-existent interest rates.

The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.