The Latest Full-Cycle Events for Nontraded REITs
February 1, 2019 | Maria Smorgonskaya and James Sprow | Blue Vault
In June 2012, Blue Vault published the first comprehensive study of full-cycle events in the nontraded REIT industry. Since that time, five editions of Nontraded REIT Full-Cycle Performance Studies have been published by Blue Vault, including the most recent 5th Edition, presented in February 2018. In the most recent study, with the addition of 11 full-cycle events that were completed between October 1, 2015, through December 31, 2017, the sample size analyzed totals 56 REITs that have provided full liquidity to their common shareholders.
Blue Vault’s Nontraded REIT Full-Cycle Performance Studies are not just the only comprehensive studies to analyze the returns to shareholders over the life cycles of the nontraded REITs which have completed full-liquidity events. The studies also include the creation of unique custom benchmarks for each REIT that are constructed to mirror the asset types, geographic diversity, leverage, cost of debt and holding periods for the REIT and its investors. The custom benchmarks compare the returns on nontraded REIT investments to listed REITs and institutional portfolio returns, providing as close to an “apples-to-apples” comparison as possible. The studies also estimate returns to shareholders who tendered shares in third-party tender offers and who redeemed shares via share repurchase programs prior to the full-cycle events.
The purpose of this current article is to update the sample of the nontraded REITs whose stockholders achieved full liquidity for all their common shares and provide estimates of the rates of return to investors. (This article does not include the custom benchmarking which will be an important part of the 6thEdition Nontraded REIT Full-Cycle Performance Study.) The estimated rates of return are calculated using the initial price of the REIT’s common shares, all cash distributions made for each holding period, and the total liquidating cash flows received by shareholders as of the terminating event date. All cash flows are assumed to occur on the last day of a quarter in which payments are made, except the terminating cash flows, which are assumed to occur on the date of full-cycle event. In the case of listings, the closing price on the first trading day following the full-cycle event is used. Holding period returns are estimated for investors who invested in the first quarter of the REIT’s public offering, the middle quarter of the offering period, and the last quarter of the offering. The Excel function XIRR is used to estimate annualized rates of return.
There are eight REITs with full-cycle events occurring between January 31, 2018, and January 24, 2019, which will be added to the sample (see Tables I and II below). The only exception in the tables was NorthStar Real Estate Income Trust, as its stockholders will not receive full liquidity until their interest in a promissory note that was not part of the merger is liquidated and the proceeds paid out, which may occur as late as three years or more in the future. The estimated per share value of that interest is $0.73, but both the amount and timing of the eventual liquidation are currently uncertain.
NorthStar REIT Background
NorthStar REIT was declared effective on July 19, 2010, and raised $1.1 billion during the 35-month offering, which was closed on July 1, 2013.
According to the REIT’s prospectus, it could invest in commercial real estate loans, including senior mortgage loans, subordinated mortgage loans (also referred to as B-Notes), mezzanine loans, and participations in such loans; commercial real estate-related debt securities, such as commercial mortgage-backed securities, or CMBS, commercial real estate collateralized debt obligations, or CDOs, senior unsecured debt of real estate investment trusts, or REITs; and select commercial real estate equity investments. The initial offering price of the REIT’s single class of common shares was $10.00 per share and remained at $10.00 during the offering period.
NorthStar REIT II Background
NorthStar REIT II was declared effective on May 6, 2013, and raised $1.1 billion during the 42-month offering, which was closed on November 4, 2016.
According to the REIT’s prospectus, it was formed to originate, acquire and manage a diversified portfolio of commercial real estate, debt, securities, and other select equity investments. The initial offering price of the REIT’s single class of common shares was $10.00 per share and remained at $10.00 during the offering.
Full-Cycle for NorthStar REIT and NorthStar REIT II
On January 31, 2018, NorthStar Real Estate Income Trust, Inc. (“NorthStar I”) and NorthStar Real Estate Income II, Inc. (“NorthStar II”) merged with Colony NorthStar Credit Real Estate, Inc. (“CLNC”), with CLNC as the surviving company. According to the merger agreement, each share of NorthStar I common stock issued and outstanding immediately prior to the merger was canceled and converted into the right to receive 0.3532 shares of Class A Common Stock of CLNC, plus cash in lieu of fractional shares, each share of NorthStar II common stock issued and outstanding immediately prior to the merger was canceled and converted into the right to receive 0.3511 shares of Class A Common Stock of CLNC, plus cash in lieu of any fractional shares. Shares of the Class A Common Stock of CLNC were approved for listing on the New York Stock Exchange (the “NYSE”) and began trading under the symbol “CLNC” on the NYSE effective as of the opening of trading on February 1, 2018. The closing price for CLNC on February 1, 2018, was $20.40. As a result, NorthStar I stockholders could sell their shares and receive $7.21 as a merger consideration on February 1, 2018, and NorthStar II stockholders could receive $7.16 on the same date, based on the $20.40 closing price for CLNC, before commissions.
Although, the dollar amount of final consideration (excluding the withheld asset) received by the stockholders of NorthStar I and NorthStar II was almost equal ($7.21 vs $7.16), the difference in the rates of return for the stockholders of these two REITs was significant. Blue Vault estimates that early investors in NorthStar I earned an annualized full-cycle return (IRR excluding DRIP and before the estimated $0.73 future payout from the withheld asset) of 4.71%, whereas early investors in NorthStar II received an annualized negative 0.43% as a full-cycle return. There are two main reasons for such a dramatic difference. First, the life cycles of the two REITs differed, during which the REITs paid distributions to the stockholders: 29 quarters for NorthStar REIT I vs 16 quarters for NorthStar REIT II. Secondly, the amount of quarterly distributions paid differed. NorthStar I stockholders received on average of 8.00% in annual distributions during 29 quarters, based on the $10.00 initial offering price, whereas NorthStar II stockholders received 7.00% in annual distributions during 16 consecutive quarters based on that REIT’s $10.00 offering price.
Midterm and late investors of NorthStar REIT II earned negative 5.01% and negative 19.21% IRRs, respectively, as they paid the same $10.00 initial price as early investors paid, received a similar liquidating value, resulting in a capital loss, and received distributions in only 10 and 4 consecutive quarters, respectively.
NorthStar REIT I midterm and late investors experienced lower IRRs of 3.71% and 1.99%, respectively. Compared to NorthStar REIT II midterm and late investors, NorthStar REIT I investors received quarterly distributions for a longer period of time, i.e. 24 and 19 consecutive quarters, respectively. As a result, the differences in holding-period IRRs were less extreme.
Neither NorthStar REIT I nor NorthStar REIT II paid special distributions during their lives.
Behringer Harvard Opportunity REIT I Background
Behringer Harvard Opportunity REIT I was declared effective on September 20, 2005, and raised $548.6 million during the 27-month offering, closing on December 28, 2007.
The REIT’s investment style can be defined as opportunistic. According to the REIT’s prospectus, it could acquire properties with lower tenant quality or low occupancy rates and reposition them by seeking to improve the property, tenant quality, and occupancy rates and thereby increase lease revenues and overall property value. Further, it could invest in properties that presented an opportunity for enhanced future value because all or a portion of the tenant leases expired within a short period after the date of acquisition and the REIT intended to renew leases or replace existing tenants at the properties for improved tenant quality. The REIT could invest in a wide variety of commercial properties, including, without limitation, office buildings, shopping centers, business and industrial parks, manufacturing facilities, apartment buildings, warehouses and distribution facilities, and motel and hotel properties. Behringer Harvard Opportunity REIT I could purchase properties that had been constructed and had operating histories, newly constructed, under development or construction, or not yet developed.
The Initial offering price was $10.00 per share which didn’t change during the offering.
Full-Cycle for Behringer Harvard Opportunity REIT I
Behringer Harvard Opportunity REIT I paid quarterly distributions during 17 quarters to early investors. On average, based on the initial offering price, distribution yields were around 2.24%. As an opportunistic REIT, Behringer Harvard Opportunity REIT I had the intention to dispose of properties which had reached what the REIT believed was their optimum value for the purpose of either distributing the net sale proceeds to its stockholders or investing the proceeds in other properties.
The REIT paid special distributions once on January 26, 2007, of approximately $1.4 million ($0.077 per share) to all common stockholders of record as of December 31, 2006, which doubled distributions for Q1 2007. Late investors did not receive the special distributions.
After establishing the first net asset value per share (NAV) of $8.17 in Q2 2009, the REIT announced re-estimated NAVs five times through Q4 2014. Each time, the new net asset value was lower than the previous NAV, and eventually it was estimated to be $3.58 as of October 14, 2014.
On August 7, 2018, the board of directors declared a final cash distribution of $1.90 per share to the holders of record of the Company’s common stock as of the close of business on August 15, 2018, payable before the end of August. The final distribution was the first and only distribution made pursuant to the Company’s Plan of Complete Dissolution and Liquidation that was approved by its stockholders on January 30, 2017. The final distribution of $1.90 was within the range of net proceeds from liquidation estimated by Copyright Property Advisors, LLC, an independent appraisal firm.
Early, middle, and late investors had significantly negative annualized rates of return, with later investors having the worst negative returns due to the same capital loss over shorter holding periods.
Corporate Property Associates 17 – Global Background
Corporate Property Associates 17 – Global (“CPA 17”) was declared effective on November 2, 2007, and raised an estimated $3.1 billion during the 63-month offering which closed on January 31, 2013. According to the REIT’s prospectus, the investment focus was income-producing commercial properties and other real estate-related assets. Blue Vault defines CPA 17’s investment style as “Core”.
The Initial offering price of the REIT’s single class of common shares was $10.00 per share and didn’t change during the offering.
Full-Cycle for Corporate Property Associates 17 – Global
CPA 17 paid distributions for 44 consecutive quarters to its early investors with an average distribution yield of 6.31%, based on the $10.00 initial price. Middle investors received an average 6.49% distribution yield for 33 consecutive quarters, and late investors received a 6.50% distribution yield for 23 quarters.
CPA 17 didn’t pay special distributions to stockholders.
Effective October 31, 2018, pursuant to the Agreement and Plan of Merger, dated as of June 17, 2018, CPA 17 merged with and into Merger Sub, with Merger Sub surviving the merger as an indirect wholly-owned subsidiary of W. P. Carey, the nontraded REIT’s sponsor. Each share of CPA 17 common stock issued and outstanding immediately prior to the effective time of the merger was converted automatically into the right to receive 0.160 shares of W. P. Carey common stock (“WPC”) and fractional shares were converted to cash. On November 1, 2018, WPC closed at $64.90 per share, and as a result CPA 17 stockholders could receive $10.38 as a liquidating value.
In the case of CPA 17, late investors received higher estimated annualized rates of return than middle investors, and middle investors experienced higher estimated annualized rates of return than early investors, due to the fact that closer to the end of the offering the REIT paid higher distributions, and investors with shorter holding periods received the same capital gain, calculated based on the total liquidating value.
KBS Legacy Partners Apartment REIT Background
KBS Legacy Partners Apartment REIT was declared effective on March 12, 2010, and raised an estimated $200.2 million during the 49-month offering that closed on March 31, 2014.
According to the REITs’ prospectus, its investment portfolio would include “core” apartment buildings that were already well positioned and produced rental income, as well as more opportunity-oriented properties at various phases of leasing, development, redevelopment or repositioning.
The initial offering price for the REIT’s single class of common shares was $10.00 per share, and early and middle investors could buy shares at this price. Late investors could buy shares at $10.68 per share, according to the terms of the offering.
Full-Cycle for KBS Legacy Partners Apartment REIT
Early investors received an estimated 5.57% annualized distribution rate on average during 28 consecutive quarters, midterm investors had an estimated 6.14% average distribution rate during 23 consecutive quarters, and late investors experienced an estimated 5.95% average distribution rate during 15 consecutive quarters.
On April 5, 2017, the Company’s board of directors declared a special distribution in the amount of $1.00 per share of common stock to stockholders of record as of the close of business on April 20, 2017. All three groups of investors (early, midterm, and late) received the special distribution.
The total liquidating value of $8.47 was calculated as a sum of three liquidating distributions.
Pursuant to the Plan of Liquidation, on December 20, 2017, the Company’s board of directors authorized an initial liquidating distribution in the amount of $4.05 per share of common stock to the Company’s stockholders of record as of the close of business on December 21, 2017. The initial liquidating distribution was funded from the Company’s net proceeds from the sale of real estate properties.
On April 27, 2018, the Company’s board of directors authorized a liquidating distribution in the amount of $4.16 per share of common stock to the Company’s stockholders of record as of the close of business on April 27, 2018. The second liquidating distribution was paid on April 30, 2018, and was funded from proceeds from real estate property sales.
On December 17, 2018, the Company’s board of directors authorized a final liquidating distribution in the amount of $0.26492767 per share of common stock to the Company’s stockholders of record as of the close of business on December 17, 2018. The final liquidating distribution was funded from the remaining net proceeds from the Company’s reserve fund established by the Company pursuant to the Plan of Liquidation.
Midterm investors earned the highest estimated annualized rates of return of 5.28%. They bought their shares at the $10.00 share price, having a lower capital loss compared to the late investors, and they had the highest (average) distribution rate. The lowest estimated annualized rates of return were experienced by the late investors, though they had the 5.95% average distribution rate because they paid the higher initial share price of $10.68, which made their capital loss greater than that of the midterm and early investors.
American Finance Trust Background
American Finance Trust (“AFIN”) was declared effective on April 4, 2013, and raised an estimated $1.5 billion during the 7-month offering period, which closed on October 31, 2013. According to the REIT’s prospectus the Company sought to build a diversified portfolio comprised primarily of freestanding single-tenant retail properties that were double-net and triple-net leased.
The initial offering price for the REIT was $25.00 per share which did not change during the offering period.
On February 16, 2017, the REIT completed a merger with American Realty Capital – Retail Centers of America, Inc. (“RCA”). Each outstanding common share of RCA was converted into 0.385 shares of AFIN plus a cash amount equal to $0.95 per share. Prior to the merger, AFIN and RCA each were sponsored, directly or indirectly, by AR Global.
Full-Cycle for American Finance Trust
American Finance Trust (originally American Realty Capital Trust V, Inc.) had the shortest offering period among the seven REITs in the latest sample. As a result, early, mid, and late investors received distributions roughly over the same period of time: 23 quarters for early investors, 22 quarters for mid investors, and 21 for late investors. There were no special distributions paid to the shareholders. On average, annualized distribution rates based upon the $25.00 offering price were 6.18% for early investors, 6.16% for mid investors, and 6.14% for late investors.
The REIT listed its Class A common shares on NASDAQ on July 19, 2018, under the ticker “AFIN.” The listing did not result in total liquidity for current common stockholders. Rather, only 50% of AFIN’s common shares were freely tradeable upon listing. To effect the listing and address the potential for selling pressure that may have existed at the outset of the listing, the REIT listed only its Class A common stock. The REIT had created two other classes of common stock, Class B-1 and Class B-2, each representing approximately 25% of the company’s outstanding common shares. The Class B-1 shares automatically converted to Class A shares on October 10, 2018, and the Class B-2 shares converted to Class A shares on January 9, 2019.
On July 20, the Class A shares opened at $15.00 and traded as high as $15.19 and as low as $13.98, closing at $13.98. As a result, for the purpose of IRR calculation, we assume that each shareholder could receive 50% of the closing price on this day.
On October 10, 2018, a 25% “tranche” (the Class B-1 common shares) were converted to Class A shares and were freely tradeable. We add 25% of the closing price on October 11, 2018, of $14.55 to the total liquidity value in our calculations.
The final 25% “tranche” (the Class B-2 common shares) were converted into shares of Class A common stock on January 9, 2019. Upon the completion of the conversion of the Class B-2 common stock, all of the REIT’s outstanding common stock became Class A common stock listed on Nasdaq. For the purpose of calculations, we added 25% of the closing price on January 10, 2019, of $13.19 to the final liquidity value.
As a result of the three tranches of common stock conversions and exchange listings, we calculate the total liquidating value to be $13.93, which means that all investors had a capital loss of 44.3% (simplified despite the timing differences in the cash flows available to shareholders). Even though American Finance Trust paid relatively high distributions during the REIT’s existence as a nontraded or partially nontraded entity, the 44.3% capital loss played a crucial role in the estimated annualized rate of returns being significantly negative for all three categories of investors.
American Realty Capital – Retail Centers of America Background
American Realty Capital – Retail Centers of America (“RCA”) was declared effective on March 17, 2011, and raised an estimated $938.7 million during the 42-month offering period, which closed on September 12, 2014.
According to its offering prospectus, the Company was formed to acquire existing anchored, stabilized core retail properties, including power centers, lifestyle centers, grocery-anchored shopping centers and other need-based shopping centers which are located in the United States and at least 80% leased at the time of acquisition, also enclosed mall opportunities which are located in the United States for reconfiguration into an open-air format. The REIT could also invest in real estate-related debt and investments secured by or representing an interest in the types of assets which the REIT intended to acquire.
The initial offering price for the REIT was $10.00 per share which did not change during the offering period.
On February 16, 2017, the REIT completed a merger with American Finance Trust (“AFIN”). Each outstanding common share of RCA was converted into 0.385 shares of AFIN plus a cash amount equal to $0.95 per share. Prior to the merger, AFIN and RCA each were sponsored, directly or indirectly, by AR Global.
Full-Cycle for American Realty Capital – Retail Centers of America
After the offering was announced effective in March 2011, the company began to accrue dividends starting from June 8, 2012, and the first dividends were paid in Q3 2012. Early, mid, and late investors received regular dividends during 25, 23, and 17 consecutive quarters, respectively. Before the merger, on average, all investors received 6.40% annually, based on the $10.00 initial offering price. After the merger with American Finance Trustin Q1 2017, when the RCA investors converted their shares into 0.385 shares of AFIN, all the investors received distributions based on the AFIN distribution rate. If we recalculate the annualized distribution rate for RCA shareholders based on the 0.385 ratio of shares they received in the merger, then their average annualized distribution rate would be equal to 5.02% after the merger. The total liquidating value for RCA shareholders was $6.31, consisting of $0.95 received as a cash consideration in the merger and 0.385 of the liquidating value of $13.93 for AFIN shareholders, consisting of the dollar amounts which shareholders could receive selling their tranches of Class A, Class B1, and Class B2 shares on the stock exchange the next day after they became tradable. RCA shareholders experienced a 36.9% capital loss, less than that of AFIN shareholders. Early RCA investors received a positive IRR of 0.33%, whereas mid and late investors had negative 0.64% and negative 3.84%, respectively.
Strategic Storage Growth Trust Background
Strategic Storage Growth Trust was declared effective on January 20, 2015, and raised an estimated $271.7 million during the 26-month offering period, which closed on March 31, 2017.
According to the Company’s offering prospectus, it was formed to invest in opportunistic self storage facilities, which may include facilities to be developed, currently under development or in lease-up and self storage facilities in need of expansion, redevelopment or repositioning.
The initial offering price for the REIT’s Class A share was $10.00 per share until April 14, 2016, when the Board determined a new share price of $11.17 per Class A share.
On January 24, 2019, upon completion of the REIT Merger, each share of Strategic Storage Growth Trust common stock was converted into the right to receive an amount in cash equal to $12.00 per share, without interest and less any applicable withholding taxes.
Full-Cycle for Strategic Storage Growth Trust
Strategic Storage Growth Trust started to pay distributions to its shareholders commencing November 1, 2015. Early investors, who started to buy shares in the public offering in the second quarter of 2015, received their first distributions in the fourth quarter of 2015. On average, early investors received 3.13% annual distributions during 14 consecutive quarters. Middle and late investors had to invest at a higher price of $11.17 after the Board of Directors increased the offering price. On average, middle investors received 3.54% annual distributions during 11 consecutive quarters, and late investors received 3.52% on average during 8 consecutive quarters.
On January 24, 2019, pursuant to the Agreement and Plan of Merger, dated as of October 1, 2018 among Strategic Storage Growth Trust, SS Growth Operating Partnership, L.P., Strategic Storage Trust II, Inc (“Merger Sub”), Strategic Storage Operating Partnership II, L.P., and SST II Growth Acquisition, LLC, Strategic Storage Growth Trust merged with and into Merger Sub, with Merger Sub continuing as the surviving company in the merger. As a result of the merger, each share of Strategic Storage Growth Trust common stock was converted into the right to receive an amount in cash equal to $12.00 per share, without interest and less any applicable withholding taxes.
All the investors (early, mid, and late) received a capital gain as a result of the full-cycle event. Also, Internal rates of return for all investors were positive, with a maximum of 8.04% for early investors, minimum of 6.18% for middle investors, and 7.21% for late investors.
Sources: SEC, Blue Vault
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