Capital Raise vs. Share Redemptions by NTRs with Continuous Offerings
May 20, 2019 | James Sprow | Blue Vault
The liquidity features of continuously offered nontraded REIT programs and interval funds can be attractive to investors who may shy away from programs that historically have locked up their funds for many years without clearly defined goals for the timing of terminating liquidity events. Among the nontraded REIT programs raising capital in May 2019, at least 13 are raising equity capital through continuous offerings compared to just six that have stated their planned public offering closing dates.
Historically, nontraded REIT offerings typically had closing dates two years after they were declared effective by the SEC. Follow-on offerings could extend the capital raising in some cases, but most offerings were closed within a limited time frame. Common share redemption programs were limited, both in the dollar amounts available for share buy-backs (typically limited to proceeds from the DRIP) and in the prices paid per share (discounted on a sliding scale based upon the number of years held). Many REITs limited redemptions to cases of shareholder death or disability, or in some instances, suspended or eliminated share redemptions altogether. These restrictions combined to make nontraded REIT shares extremely illiquid for most shareholders. In many cases, the only alternative avenue for those seeking to liquidate their investments in NTRs was third-party auction sites where shares could be sold at significant discounts from estimated net asset values, with additional transaction costs as well.
With the advent of continuous offerings by NTRs combined with NAV-based pricing, beginning with such offerings as Cole Real Estate Income Strategy (Daily NAV) and American Realty Capital Daily Net Asset Value Trust in 2010, and the conversion of Dividend Capital Total Realty Trust, now Black Creek Diversified Property Fund Inc., to an NAV-priced offering in 2011, a trend toward offering NTR investors increased liquidity was begun. But, equity sales by these REITs was initially disappointing. For example, by the time American Realty Capital decided in 2015 to liquidate their daily NAV REIT, the company had raised only $25.4 million, including shares issued via the DRIP. Cole Real Estate Income Strategy (Daily NAV), which is now CIM Income NAV, was relatively more successful and had issued 20.4 million shares of common stock in its offering for gross proceeds of $361 million by the end of 2016. By comparison, Cole Credit Property Trust III, an offering from the same REIT sponsor and investing in similar properties, raised gross proceeds of $4.9 billion from 2009 to 2012.
The current roster of continuous offerings by nontraded REIT programs is shown in Table A. Not all these programs intend to be perpetual. For example, the sponsor of Black Creek Industrial REIT IV has stated that it plans to eventually have a full-cycle liquidity event. The common features across these offerings are regular NAV pricing (either monthly or daily) and increased liquidity options for common shareholders.
|Black Creek Diversified Property Fund Inc.||1/27/2006|
|Black Creek Industrial REIT IV, Inc.||2/18/2016|
|Blackstone Real Estate Income Trust, Inc.||8/31/2016|
|CIM Income NAV, Inc.||12/6/2011|
|FS Credit Real Estate Income Trust, Inc.||9/11/2017|
|Griffin Capital Essential Asset REIT II, Inc.||7/31/2014|
|Hines Global Income Trust, Inc.||8/20/2014|
|InPoint Commercial Real Estate Income, Inc.||5/3/2019|
|Jones Lang LaSalle Income Property Trust, Inc.||10/1/2012|
|Nuveen Global Cities REIT, Inc.||1/31/2018|
|Oaktree Real Estate Income Trust, Inc.||4/30/2018|
|RREEF Property Trust, Inc.||1/3/2013|
|Starwood Real Estate Income Trust, Inc.||12/27/2017|
The question we want to answer in this article is this: Given the more liberal common share redemption options available to shareholders, what has been the net effect on equity capital raise by continuously offered nontraded REITs?
Shown in Table B are some estimates of the capital raised by nontraded REITs with continuous offerings for the year 2018 and the share redemptions for the year. When we compare the offering proceeds and the share redemptions, it is clear for some REITs providing liquidity to shareholders has a very significant net effect on the potential for growth in the REIT’s assets.
|Nontraded REIT||2018 Capital Raise Incl. DRIP ($ Mill.)||Share Redemptions ($ Mill.)||Ratio of Redemptions to Capital Raise||Estimated Net Capital Raise|
|Black Creek Diversified Property Fund Inc.||$160.1||$170.9||107%||($10.8)|
|Black Creek Industrial REIT IV, Inc.||$199.7||$0.6||0%||$199.1|
|Blackstone Real Estate Income Trust, Inc.||$2,911.2||$49.5||2%||$2,861.7|
|CIM Income NAV, Inc.||$181.3||$48.3||27%||$133.1|
|Griffin Capital Essential Asset REIT II, Inc.||$27.4||$23.8||87%||$3.6|
|Hines Global Income Trust, Inc.||$56.4||$12.5||22%||$43.9|
|Jones Lang LaSalle Income Property Trust, Inc.||$135.2||$79.2||59%||$56.0|
|RREEF Property Trust, Inc.||$42.6||$10.6||25%||$32.0|
For the most recent quarter, the ratio of share redemptions to the weighted average shares outstanding is also revealing. Table C shows those ratios for the same REITs listed in Table B.
|Nontraded REIT||Q4 2018 Weighted Average Shares Outstanding||Q4 2018 Shares Redeemed||% of Weighted Average Shares Redeemed|
|Black Creek Diversified Property Fund Inc.||128,740,000||4,435,000||3.44%|
|Black Creek Industrial REIT IV, Inc.||16,562,000||62,345||0.38%|
|Blackstone Real Estate Income Trust, Inc.||416,064,014||2,392,116||0.57%|
|CIM Income NAV, Inc.||29,416,331||773,375||2.63%|
|Griffin Capital Essential Asset REIT II, Inc.||77,657,627||505,977||0.65%|
|Hines Global Income Trust, Inc.||42,538,000||406,346||0.96%|
|Jones Lang LaSalle Income Property Trust, Inc.||137,163,633||2,161,213||1.58%|
|RREEF Property Trust, Inc.||9,087,295||360,832||3.97%|
In conclusion, share redemptions have a significant impact on the net capital raised by nontraded REITs with continuous public offerings. For three of the REITs in the current sample, funds used for redemptions exceeded 50% of the capital raised for the year. In Q4 2018, the ratio of the quarterly redemptions to the weighted average shares outstanding exceeded 2.5% for three REITs. Annualized, these ratios of redemptions to shares outstanding would exceed 10%. This places a significant burden on the REITs in their capital raising efforts. It also requires these REITs to maintain enough cash to meet the ongoing demand by shareholders for redemptions, which negatively impacts their ability to make long-term investments in commercial real estate.
Sources: SEC, Blue Vault
Best Due Diligence meeting in the industry. No sales pitches, senior level decision makers, meaningful discussions and the Broker Dealer networking sessions were especially useful. Thanks to Blue Vault for raising the bar!