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US nontraded REIT space sees slowdown in new entrants


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US nontraded REIT space sees slowdown in new entrants

The nontraded REIT sector has seen a substantial decline in theamount of new REITs coming into the market since October 2014, with only four nontradedcompanies electing REIT status in 2015 and a single company doing so year-to-datein 2016, compared to the 15 companies in 2014 and 13 companies in 2013.

Moreover, six of the companies that joined the nontraded REITmarket since 2013 have already left the space, including Global Net Lease, originally named American Realty CapitalGlobal Trust Inc., which elected its REIT status in January 2013, and then wenton to publicly list on the NYSE startingJune 2, 2015.

This drop-off in nontraded REITs comes in the wake of the SEC'sapproval on Oct. 10, 2014, of the amendments set forth in the FINRA Regulatory Notice15-02, designed to provide greater transparency regarding the costs associated withcertain nontraded investments, including nontraded REITs, as well as to improvethe valuations reflected on shareholders' account statements. According to the amendments,which became effective April 11, broker/dealers for nontraded REITs are now requiredto include the estimated share value based on either a net investment method oran appraised value method.

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Of the five nontraded REITs that have elected REIT status sincethe SEC's approval of FINRA Regulatory Notice 15-02, two come from the hotel sectorand one each from the single-tenant, diversified and office sectors. Combined, thesefive companies had just over 51.8 million common shares outstanding as of Dec. 31,2015.

The most recent company to join the nontraded REIT space, hotelREIT Moody National REIT II Inc.,said in its Form 10-Kfiled March 30 it would elect to be taxed as a REIT beginning with the taxable yearending Dec. 31.

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The company was formed in 2014 and kicked off its best-effortsoffering in 2015 but did not meet all of the qualifications for REIT status in eitherof those years. As of Dec. 31, 2015, the company had roughly 521,000 common sharesoutstanding and had announced 73.29 cents per common share in dividends during theyear.

Looking at the entire nontraded U.S. REIT space, there were 66SNL-covered nontraded REITs that file financials with the SEC as of April 14, spanning11 different property sectors, compared to 189 publicly traded U.S. REITs.

The diversified sector accounted for the largest number of nontradedU.S. REITs, with 21 companies — just under one-third of the entire U.S. nontradedREIT sector.

InvenTrust PropertiesCorp., a diversified company that elected REIT status in January 2005,accounts for the largest number of common shares outstanding — just over 862.2 millionas of Dec. 31, or roughly 14.5% of the 5.95 billion shares outstanding in SNL'snontraded REIT coverage. The second-largest company, ranked by common shares outstanding,is Corporate Property Associates 17- Global Inc., a diversified REIT with 337 million common shares outstandingas of Dec. 31.

A balance sheet analysis of the 66 SNL-covered nontraded REITsreveals that median leverage, measured as total debt-to-gross properties, was 54.98%at year-end 2015, slightly higher than the 49.87% for publicly traded REITs.

In tandem with the enhanced regulatory atmosphere, M&A activityhas impacted the nontraded REIT landscape in recent years. Since 2013, there havebeen 15 M&A announcements where the target company was one of the SNL-coveredU.S. nontraded REITs. In the most recent, AppleHospitality REIT Inc. announcedApril 14 its intention to purchase AppleREIT Ten Inc. in a deal with a reported transaction value of $1.3 billion.After the closing of the transaction, Apple Hospitality shareholders are expectedto own approximately 78% of the combined entity, with Apple REIT Ten shareholdersowning the remaining 22%.

The largest transaction announced since 2013 was Nov. 4, 2015, when ,an industrial real estate company based in Singapore, purchased in a dealwith an announced transaction value of $4.55 billion.

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Given some of these factors, at the annual REIT Symposium inNew York City on April 13, Citi analyst Michael Bilerman pondered the future of the nontraded REIT industry, citingthe aforementioned regulations, which could drive down fees significantly, as wellas a problematic lack of liquidity and the public REIT sector serving as a more-transparentalternative for investors. While the panelists could see where Bilerman was comingfrom, S&P Global Market Intelligence reported, they came to the consensus thatthe nontraded REIT sector was perhaps more resilient than it appears.

To solidify this point of view, VEREIT Inc. CEO Glenn Rufrano noted that some investors actuallyfavor the sales-pitch approach that comes from the nontraded sector, as opposedto researching and investing through the open market. Rufrano also mentioned thatnontraded REITs offer a "nice cash-flow return and a very simple group of assetsthat they can own and understand and feel themselves."

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For further company research, try SNL's Nontraded REIT 2-Page Profile Excel template, as well as other real estate templates that can be found in the template library.