Non-Traded REIT Values Prove Unsettling for Investors

Investors who own shares in some non-traded real estate investment trusts (REITs) are growing increasingly unhappy these days. That’s because many are learning, for the first time, that the true value of their investments is far below what they were led to believe by their broker and the REIT’s sponsor.

Real estate investment trusts are designed to pool the capital of numerous investors together to buy a portfolio of properties – including office buildings, hotels and apartments – that a typical investor might not otherwise be able to purchase individually. There are two types of public REITs: Those that trade on a national securities exchange and those that do not. The latter is a non-traded REIT.

The lack of a public trading market creates illiquidity and valuation complexities. In addition, a number of factors affect the valuation of non-traded REITs, including the portfolio of real estate assets owned, strength of the trust’s balance sheet, overhead expenses and cost of capital.

In recent months, the valuation of non-traded REITs has become a topic of concern among non-traded REIT investors. As reported in an April 24 article by the Wall Street Journal, this very issue has become a reality for investors in Retail Properties of America, also known as Inland Western REIT. In April, the non-traded REIT went public, with an initial public offering of $3.20 before a reverse stock split. Nearly one year ago, shares of the REIT were valued at nearly $7.

The scenario is far from isolated. In 2006, another non-traded REIT, KBS Real Estate Investment Trust 1, showed an original price per share of $10. Its current valuation is $5.16.

Also this year, Cornerstone Core Properties REIT disclosed in a regulatory filing with the Securities and Exchange Commission (SEC) that the share price of its REIT, which was sold to investors at $8 a share in 2008, actually is now valued at $2.09.