I guess if you wait long enough, everything that once was will come back to us again. Even the bad stuff.

This deeply philosophical insight came to me as I was reading yet another article in our trade press about an interesting new category of investments that are blandly called "non-traded REITs." 

One of the articles cited Robert Stanger & Co., the firm which back when limited partnerships were popular investments for financial planners to recommend, used to offer deal term ratings on various tax shelter programs.

In the late 1980s and early 1990s, so many of those programs collapsed under the weight of their fees, costs, expenses and (ahem) punitive deal structures that the trade organization representing partnerships changed its name to The Investment Program Association.

Today, Keith Allaire, who works for Stanger, is now chair of The Investment Program Association's "Non-Traded REIT Committee." (Here's the web site: https://www.ipa.com/members/committees/non-traded-reits.) 

Those limited partnership days were dark ones for the profession.  Among the complaints about these pooled investment vehicles (other than the fact that so many of them collapsed and took investor dollars with them) was that they were essentially illiquid. That means that the general partner, which controlled the investment, had endless opportunities to, over time, add in new expenses and management fees that investors were powerless to prevent. 

Another complaint was that during the selling period, the investments could be made to look like cash cows by paying out some of the money that was being raised from other investors -- money, to be perfectly blunt, that they weren't actually earning.

For those readers who are not sophisticated in business matters, using new equity to pay dividends is not considered a productive way to generate high overall returns.

Of course, by the time investors found out that the distributions were actually paid from the new equity being raised, it was too late. They were locked into the investment until the general partner decided to sell properties. And if the general partner was earning sweet management fees and larding on other costs, there was not a high incentive to give investors back their money.

The third characteristic of limited partnerships was the way they were wholesaled to the profession with fancy "due diligence" trips to exotic locations, plus a bombardment of slick marketing materials.

So today when I see non-traded REITs, my mind immediately flashes back to the black hole of investment returns that characterized so much of the limited partnership industry: non-transparent investments that the investor cannot sell on the open markets. 

And lately, I've been hearing advisors saying that in addition to being bombarded with articles, they're receiving slick marketing materials and an offer to fly them to informational meetings and due diligence retreats at posh hotels.

So I say to myself: This all can't be happening again, can it? 

Then I find a web site called REITwrecks.com, which publishes and updates a chart that takes a lot of SEC 10Q/10K filings from a growing proliferation of non-traded REITs, and compares operating cash flow per share with each non-traded REIT's current yield.  (You can look for yourself here: http://www.reitwrecks.com/forum/viewtopic.php?f=2&t=8

So you see that American Capital Realty has been paying shareholders a nice fat 6.70% yield -- certainly an attractive number in today's yield-starved environment. But operating earnings per share comes to -92 cents. If these SEC filings are accurate, I wonder how long those yields are going to be paid. 

Taking another non-traded REIT at random, the CNL Lifestyle Properties offering is paying a more modest 6.25%, which last time I checked, beats what you can get from Treasury bonds.  But the operating earnings per share is calculated at -4 cents. A more dramatic example is the Hines Global REIT, which is paying out 6.90% but under GAAP accounting, is earning negative $2.64 a share. In fact, if you scroll down the list, you find that the only non-traded REITs that are earning as much as they are paying out are those -- like W.P. Carey CPA 14 or Shopoff Properties Trust -- which have suspended distributions altogether.

The marketing materials talk about safety, stability and reliability of income -- and you can hear all about it if you want a non-traded REIT sponsor to fly you to a really nice hotel somewhere where you and your spouse can enjoy some vacation time on your own.

Or you can comment on this interesting new development in our marketplace. This is more detailed than my usual ConVERESations, but I'm curious whether anybody else thinks that the old limited partnership mentality is sneaking back into the profession through the back door, and if so, what we should do about it?

What do you think?


For more on planning, client service, practice management and marketing, or to join the Inside Information community, contact Bob Veres at Bob@BobVeres.com or go to http://www.bobveres.com/.



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