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Option1307 (29.70)

Calling JakilaTheHun and Other REIT Knowledgeable Fools, Help!

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July 30, 2010 – Comments (5) | RELATED TICKERS: K , B , S

Hello hello my fellow fine Fools, I hope you are all enjoying thus lovely Friday afternoon and getting ready for the weekend. I sure am! But before we get there, let’s all get together, hold hands and sing Kumbaya, and help poor little me understand something…

Has anybody ever heard of a non-tradable REIT before and know anything about them?

They were recently brought to my attention as a unique investment opportunity in the real estate sector and I’ve been looking into them recently. First off, I need to clarify what I am talking about in case Fools are confused.

An REIT (real estate investment trust) normally is a company that is traded on major US stock exchanges and for all practical purposes is traded just like any other stock. The special aspect of an REIT is that they are “trust funds” and thus by law are required to pay out the majority (90%) of their earnings as dividends to shareholders.

A closed end REIT or non-tradable REIT is similar in that it is required to payout 90% of its earnings to shareholders; however, the difference is (and this is MAJOR) is that it cannot be traded like a normal stock. Once you purchase shares of a non-tradable REIT it is very difficult to sell these shares. Instead you are expected to hold these shares for 5-7 years until the REIT liquidates its assets etc., then and only then will you get to “sell” your shares. The whole process is strange, I admit, but just think of holding a bond to maturity and this may help you understand a bit better.

Why the strange process you ask and, what benefits does this mean for you my fellow Fool? Well, I’m not entirely sure to be honest, thus my plea for help;) To me, it seems that “normal” liquid REITs would be able to invest in similar properties etc and have the added benefit of, well, being liquid.

However, there appear to be a few certain advantages that are associated with these non-tradable REITs. The fact that they are not traded will prevent their “stock” from taking a drastic beating like so many “normal” REITs did in the recent down market aka great recession of 2008/09. Yes if RE prices continue to cater their assets value would obviously follow suite, but RE value is certainly more stable than REIT stock prices. (See basically any REIT chart from 2008-2010, yikes!) Also, you essentially are buying a “part” of the buildings (your $$ is helping finance the purchase) and thus if their value increases your shares should theoretical increase as when the REIT liquidates its assets. I know a similar argument can be made with the purchase of any REIT shares (or any stock for that matter), but non-tradable REITs seem to be slightly different in that they are designed buy properties, and then sell them. Many traditional REITs plan on holding and leasing their properties indefinitely. A slight difference, but a difference nonetheless.

The specific fund that was brought to my attention actually does look rather promising for several reasons. For starters it is called the KBS Real Estate Investment Trust II (see here for more info). The fund buys commercial and industrial RE, manages these properties for several years, and then sells them off at a profit (theoretically). Fortunately for this fund they started buying up properties after the economic a** kicking. They purchased 4 properties in late 2008, 2 properties in 2009, and just picked up 8 more properties in the first half of 2010. All buildings are class A or class B properties and have a total square footage of around 4 million. Ya, that’s a lot of space! KBS did a fantastic job of buying up properties in high demand areas just after the RE market collapsed. Thus, these assets should be considerably more valuable in 5-7 years when they are thinking about selling them. Sounds pretty sweet to me!

The buildings they own are leased out mainly to fortune 500 companies and they all have high occupancy rates of above 92%. (Read stable companies that are not going anywhere any time soon.) The best part is, they have a stellar dividend of 6.5% to top it all off.

Sounds pretty reasonably right Fools?

 I’m not saying I’m going to dive right into this sort of an investment vehicle right now (or ever…?), although it does sound interesting, but I am of the opinion that learning about different options only makes us smarter in the end.

So Fools, what am I missing here? What are potential negative outcomes here that I am overlooking? Any advantages/disadvantages do investing in these non-tradable REITs vs traditional liquid REITs? Any help is greatly appreciated as this specific type of REIT is foreign to me.

Keep on keeping on Fools and enjoy your weekend!

5 Comments – Post Your Own

#1) On July 30, 2010 at 3:41 PM, Griffin416 (99.98) wrote:

This is a private investment and are NOT subject to such SEC rules like sarbains oxley. I work for something like a private REIT. The accounting rules are very bizarre for someone not in the "in" crowd. This is a sophisticated investment, and not to insult your intelligence, but kind of like what GS was accused of selling, you could easy and very likely loose money if you do not truly understand what you are buying.

If they are quoting what they bought in square feet (I did not read the prospectus) it sounds like office/ industrial space. This type of real estate has a long way to go down. This is coming from a guy who is generally bullish on the economy/ stocks. Residential real estate has most likely bottomed and might be rocky for a while depending on what type it is and where it is located. Office properties will get crushed. 

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#2) On July 30, 2010 at 3:55 PM, Griffin416 (99.98) wrote:

If you want high yield from vulture funds, check out CIM 17% yield. Or a gov't backed play on the yield curve, check out AGNC 20% yield. 6.5% yield for a REIT is garbage, no offense KBS

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#3) On July 30, 2010 at 4:11 PM, Option1307 (29.70) wrote:

Griffin416

Thanks for the respones, much appreciated.

This is a private investment and are NOT subject to such SEC rules like sarbains oxley. 

I was well aware of this fact and is definitely one of the reasons why I initially was warry of funds like these. I'm glad you agree. 

and not to insult your intelligence

None taken. I honestly had not heard of these until recently and was curious as to what other Fools thought. I can read all I want about them and get through their prospectus etc., but its always good to ehar another persons perspective etc. So thanks!

Residential real estate has most likely bottomed and might be rocky for a while depending on what type it is and where it is located. Office properties will get crushed.  

I basically agree with this statement and is definitely something to think about before investing in a fund like this or any other commerical RE fund.

I haven't given much thought into vulture funds etc. in the past, maybe I'll look into them a bit more.

Thanks again for all your thoughts, I'll try and respond later in greater detail when I have time. Until then, enjoy your weekend!

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#4) On July 30, 2010 at 7:06 PM, JakilaTheHun (99.94) wrote:

I'd wager to guess that a large chunk of REITs are not publicly traded.  However, I've only dealt with REITs traded on major public markets thus far.  I'm not sure how information about assets, finances, and capital is communicated to shareholders for non-publicly traded REITs. 

The obvious disadvantage here is that a non-public REIT is closer to owning actual real estate in many ways.  One reason I like public REITs (especially during the downturn) was the high liquidity, which meant all negative news was priced into them much more quickly than more illiquid RE instruments.  As I like to make large returns, I'm also attracted by more volatile investments.  

Another disadvantage is that private REITs have less options if they get into trouble.  Public REITs can always hit the capital markets in a lot of worst-case scenarios (as many of them did during the worst of the crisis).  Therefore, you normally avoid liquidation and bankruptcy scenarios (not always - as GGP showed).  

There are advantages to this type of investment vehicle, as well, but I'd say you have to look at each individual REIT, strategies, and management to see if any of those advantages are present.

 

I'm not going to try to sway you one way or another.   The only thing I'd say is that it's of vital importance to do very thorough research and DD on something like this before going in --- because you'll have a hard time getting out if it goes sour. 

Good luck with it if you decide to go into it.

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#5) On July 30, 2010 at 7:17 PM, Option1307 (29.70) wrote:

I'm not going to try to sway you one way or another.  

Not looknig for you to, I know you have had a lot of experience with REITs in the past and was just looking for your thoughts. You pretty muched summed up my fears surrounding investments like this and why I will likely stay away from it/them.

Thanks for sharing your thoughts, they are always appreciated.

Enjoy your weekend!

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