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Private REITs:
Positioned for growth

While publicly traded REITs in the United States are suffering from Wall Street's schizophrenia and the capital markets' skittishness, publicly registered, untraded REITs, also known as private REITs, are positioned to take advantage of current market conditions.



"Private REITs are just about the only type of real estate company that can continue to raise cash in today's market and acquire properties without financing," points out Keith Allaire, managing director of Robert A. Stanger & Co., a Shrewsbury N.J.-based investment banking firm that specializes in the direct investment securities markets.

Unlike publicly traded REITs, private REITs such as Inland Real Estate Investment Corp., Behringer Harvard Funds and Wells Capital Inc. are not dependent on the capital markets to raise money. While publicly traded REITs like ProLogis and SL Green must issue new stock to raise equity or issue new debt, private REITs can sell directly to individual investors.

"That puts private REITs in an extremely strong position to take advantage of the real estate sector today," Allaire notes. "They're cash rich and are in a different competitive position relative to other buyers who are debt-dependent.

Escaping volatility
Investment in untraded REITs reached $11.6 billion in 2007 - a record for the market, according to Stanger.

"The resilience in non-traded REIT fundraising reflects two fundamental attributes of these investment products - the relative value stability of non-traded real estate compared with the volatility of the stock market and the attractive spreads on current income produced by non-traded REITs relative to other secure, fixed income alternatives," says John White, executive director of the Investment Program Association.

Investments in Private REITs jumped more than 70 percent from 2006, primarily due to the successful liquidation of a number of non-traded, public REITs that were formed in the late 1990s and early 2000s and investors reinvesting the proceeds in new private REITs.

"These liquidations confirmed the investment merit of non-traded REITs," Allaire says. "It is no surprise that a considerable amount of the cash proceeds distributed in these liquidations was reinvested in newly forming non-traded REITs since investors had earned rates of return in the mid-teens while receiving stable and competitive levels of income along the way. The most recent batch of liquidations has lived up to its promise and shown more financial advisors and investors that this type of investment really makes sense in a portfolio."

Inland Real Estate Investment Corp. led fundraising in 2007 with approximately $3.6 billion - by far the largest amount ever raised in one year by a direct participation program (DPP) sponsor. Other top real estate fundraisers included Apple Hospitality ($1.4 billion), Behringer Harvard Funds ($1.2 billion), Wells Capital, Inc. ($894 million), Hines Advisors LP ($823 million), Dividend Capital Advisors LLC ($809 million), KBS Capital Advisors LLC ($730 million), and CNL Investment Company ($725 million).

"These REITs continue to have a strong appeal given what's happening in the stock market," Allaire says. "If you want to have real estate in your portfolio and you invest in REIT stocks or even REIT mutual funds, you're subjecting yourself to the vagaries of the market."

Public REITs are trading at a significant discount to their net asset value, and it doesn't take a lot of negative economic news for the REIT stocks to have a major price swing. "Recently, we've seen REIT stocks move more than 5 percent in one day," Allaire points out.

Allaire is bullish on the long-term demand for non-traded REITs, but he expects investment volume to diminish this year as investors grapple with economic uncertainty and concerns about real estate values. He estimates investment volume will drop to $6.5 billion or $7 billion, consistent with annual levels from 2003 to 2006.

"I expect that the turbulent stock markets may enhance the attraction to non-listed products for real estate investors," say Jason Mattox, executive vice president of Dallas-based Behringer Harvard. "The general economic mood may dampen the overall appetite for real estate and other investments, but I like our position in the marketplace."

Aggressively raising money
Although the overall economy might be kind of shaky, that's not stopping private REITs from aggressively raising money. New York City-based WP Carey & Co. LLC, for example, is raising money for its 16th non-traded REIT, according to CEO Gordon DuGan. The company, focuses on corporate sale-leaseback investments across the globe, has filed to raise $2 billion over several years.

"We think it's a terrific time to raise money because of the interesting investment opportunities in the coming years," DuGan says, pointing out that companies are more willing to sell real estate when the credit markets get difficult. "We're bucking the trend somewhat because we want to raise a lot of money."

DuGan says that W.P. Carey has 100,000 investors in its private REITs today - primarily individual investors. "Our primary market is known as "mass affluent investors," he explains.

Those investors are the same ones that are investing in other private REITs, Allaire notes, adding that institutional investors such as large pension funds and life insurance companies rarely invest in these vehicles because they prefer setting up their own arrangement such as a joint venture.

While W.P. Carey raises money, other private REITs are focused on investing the money they've already raised. Houston-based Hines REIT recently purchased a two-building, class A office complex in El Segundo, Calif. for $120 million.

Located near the Los Angeles International Airport, the two-buildings include 550,000 rentable square feet in two 11-story buildings. The property is fully leased to Raytheon's Space and Airborne Systems and DIRECTV Group Inc.

"Across the board, these companies really like what they see in terms of acquisition potential," Allaire says.

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