Dear Mr. Valley:
After reading the column by Anthony Downs entitled “The Problem with Low Interest Rates” (August 2003), it is important to set the record straight with your readers. In his column, Mr. Downs makes a number of misstatements relating to non-traded public REITs, in particular about the Wells Real EstateTrust. As the former editor-in-chief and publisher of NREI, I expected more from such a supposedly credible person as Mr. Downs. Instead, misinformation is running rampant. It seems that popularity has a price, but one that needn't be paid if more investigating were the rule rather than the exception.
First, Mr. Downs asserts that prices for commercial buildings are being bid up due to the emergence of unlisted REITs as property buyers. No facts are used to back up this claim, so one must assume that is his opinion. A look at the facts reveals that while the Wells REIT was the No. 1 buyer of Class-A commercial office properties in 2002, the company does not overpay for its acquisitions. During 2002, Wells reviewed 375(totaling $17.4 billion) in the top 40 to 50 MSAs. Based on stringent credit standards, 83 opportunities were eliminated. Offers were made on 84 deals totaling $4.1 billion and 35 transactions were finalized for a total of $1.4 billion. Interestingly, in 44% of the deals closed, the Wells REIT was not selected as the leading buyer for the acquisition based on price. However, because the Wells REIT has gained a reputation as a credible buyer, sellers selected us over higher bidders based on our ability to close the deal.
Second, Mr. Downs asserts: “For the REITs to pay the 6% to 8% dividend on the full amount invested, the REITs must heavily leverage the investors' funds by borrowing at current low rates. Then they are able to bid up prices of desirable properties to cap rates of 5.5% to 7%. For example, Wells Real Estate Funds — the largest of these unlisted REITs — spent $1.4 billion on Class-A office buildings in 2002. That made it the largest buyer of such properties in the nation.”
In fact, the Wells REIT, which pays predominantly cash for its acquisitions, has one of the lowest levels of leverage in the industry. At present, the Wells REIT's average leverage level is less than 10% when you factor in limited assumed debt and short-term line of credit borrowings. Other REITs, both traded and nontraded, have much more significant levels of leverage. Using Wells as an example to illustrate this point was simply not the best use of the magazine's valuable space.
Thirdly, Mr. Downs asserts: “What many buyers of unlisted REIT shares may not realize is that 15% to 20% of the money they invest is paid upfront in sales commissions and fees. That leaves only 80% to 85% available to actually invest in properties.”
As he should know, public non-traded REITs that are in a fund-raising mode typically sell shares through a financial advisor. As such, the cost of raising capital is higher than through traditional channels. Also, much of the sales fees associated with an investment in a public non-traded REIT are used to compensate the financial advisor and dealer manager. But not all advisors choose to be paid directly by the REIT. Some Registered Investment Advisors charge an annual management fee that eliminates REIT fees associated with commissions. Currently, the maximum front-end load for the Wells REIT runs close to 14.5%, as disclosed in the prospectus. But can you put a price on the quality of the long-term financial planning assistance that investors receive from a qualified investment advisor?
While Mr. Downs is certainly entitled to his opinion, and so are the myriad other industry pundits who can't quite grasp the reasons for the success of the Wells REIT, a little more investigative work would uncover more information that would be of value to your readers.
Ben W. Johnson, Wells Real Estate Funds