What do CNL Lifestyle Properties, Inland American Real Estate Trust and Behringer Harvard Multifamily REIT I all have in common? They are among a few dozen so-called non-traded real estate investment trusts, which are not listed on any stock exchange but are regulated by the Securities and Exchange Commission and the National Association of Securities Dealers.

Non-traded REITs — also referred to as unlisted REITs — are gaining favor with small investors, who for a minimum investment of as little as $1,000 hope to realize hefty returns. While most of the profit potential in unlisted REITs is at the end of a multi-year term, recently liquidated unlisted REITs have given investors the equivalent of 7.3% to 16.6% in annualized returns, according to Robert A. Stanger & Co., an investment banking firm that tracks the sector.

Insulated from stock market volatility that has hamstrung equity REITs for nearly two years, non-traded REITs raised approximately $10 billion in 2008, according to market watcher Stanger. In the past six years, investors have pumped $46 billion into the sector.

“There's a strong appetite for this product out there among individual investors,” says Kevin Gannon, managing director of Shrewsbury, N.J.-based Stanger. “Both real estate management companies as well as some publicly traded REITs are talking to us about entering this space as a means to raise capital.”

Buying power

Continued access to capital is probably the No. 1 advantage unlisted REITs offer today, says Byron Carlock Jr., president and CEO at CNL Lifestyle Properties. The Orlando-based unlisted REIT specializes in the acquisition of ski, mountain and golf recreational destinations.

Late last year, CNL acquired three ski and mountain assets in a sale-leaseback purchase from resort operator Triple Peaks. The deal included Triple Peaks' assets in Okemo, Vt., Crested Butte, Colo. and Mount Sunapee, N.H.

“What we've been doing is buying with cash and leveraging later if the debt is not available at closing time,” Carlock explains. “However, right now we are also sitting on plenty of cash reserves to weather the current environment.” CNL reported more than $300 million in cash reserves in its third-quarter 2008 report.

Individual investors buy shares of unlisted REITs through a broker/dealer with the expectation of retaining those shares and collecting a dividend until a liquidation event, typically after seven to 10 years. The front-end load that includes broker commissions and other fees varies, but averages approximately 15% of the invested amount.

Unlisted REITs generally pay out an annual dividend between 5% and 9%, and overall returns depend on proceeds of the final liquidation. Based on an analysis of seven funds that had reached liquidation by the end of 2007, Stanger found that the average investor earned a 64% return over hold periods that averaged five years. That's a return rate of about 12.5% on an annualized basis.

Minimal volatility

The price per share in untraded REITs is fixed at about $10, so investors don't have a reason to delay buying into an unlisted REIT in hopes that prices will drop. That contrasts with publicly traded REITs, where price volatility has deterred many investors from purchasing shares because they believe that prices have further to fall.

“It's harder for both companies and investors to get comfortable with stock offerings,” says Steve Marks, managing director in the New York office of Fitch Ratings. “Given the volatility, many investors may just want to wait for the stock to go lower.”

The bear market has choked capital flows and caused total returns for publicly traded REITs to drop 57% from their peak in February 2007 through early January 2009, according to the U.S. REIT index published by MSCI Inc., formerly Morgan Stanley Capital International.

In 2008 alone, total returns for publicly traded REITs plummeted 37.97%, their worst year ever, according to Barry Vinocur, editor of REIT Wrap, a daily electronic publication covering the equity REIT industry. “This is unprecedented,” he says. “In the little over 20 years that I've been covering the REIT space, I've never seen anything like what we're seeing right now.”