Calling JakilaTheHun and Other REIT Knowledgeable Fools, Help!
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!