Schorsch: Separating the REITs from the chaff

Apr 25, 2013 @ 12:00 am

Runtime: 3:26

Nicholas Schorsch, CEO of American Realty Capital Properties, discusses the plusses -- and minuses -- of property trusts.

Video Transcript

Non-traded REITs have had some-- has had-- have had a chequered history, and some of the performance has been good, and some of the performance has been less good, and some of the performance has been not good at all, just as every asset class. During the Recession, certain assets got hurt more than others. But the non-traded REITs have gone through an evolution. Non-traded REITs today have much lower fees. They have-- they still have a higher cost to capital than a traded REIT because there's more load in the capital raise. Not significantly, but there is couple points more than if you did in IPO, and that's a cost. Second of all, non-traded REITs are raising blind pool capital, which means you are raising capital to buy new assets. Whereas traded REITs historically buy assets, hold them, grow them, develop them-- it's more of a permanent strategy. So it has liquidity through the market but you're not typically building a traded REIT to then sell it. A non-traded REIT, you are buying a blind pool capital, so it's a relatively short-term investment, whether that's 3 to 6 years. It is very similar to the private equity funds, but much more transparent as a public company. So it shares the public characteristics of 8-K filings and 10-Ks, independent Boards-- all the governance of a public company and transparency. But at the same time, you are looking at a life cycle that's roughly 5 to 7 years. And then the job of the sponsor is to sell that company, or take it public, or merge it with a public company. What you see now is a unique set of circumstances in non-traded REITs. There's about $39 billion of non-traded REITs that are looking for liquidity over the next 2 years. This is a very important aspect. The industry last year raised about $12 billion, and when I say non-correlated, this doesn't trade, so you don't see the massive volatility you see in the public markets. But then again you don't have the liquidity, so there's a plus and a minus. You also don't have quite the transparency evaluation that you have in the public REIT 'cause you have analysts in the public space. So putting all that together, the key to a non-traded REIT is you acquire-- you raise the capital, acquire the assets in a time and a place in the market so it's a vintage, then you look for liquidity. That's your job. You're supposed to sell the company or find liquidity. The traded REITs are constantly liquid. They're a permanent vehicle and they've had tremendous returns over the last 5 years. So both asset classes provide very similar returns, you are in Real Estate. But one is a lot more closely correlated to the S&P and the Russell. And the other is a lot more correlated to the hard asset market, the kind of the NaCREIF rather than the NaREIT market, which is the kind of what the endowments are buying and those other fiduciary organizations whether it's a private equity fund or an endowment or a large pension. They're buying hard assets. So it allows a retail investor to get access to professional, managed, large portfolios in a public format. But again a lot less liquidity and you're really waiting for most of your value creation on the exit.


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