How much are nontraded REITs really worth? - YouTube

Hello Darlings.

And now it's time for your favorite part of the show, our

Stacking Benjamins headlines.

The first headline comes to us from Investment News.

And because we're going to be talking to people that are maybe

new with investing later with Mr.

Merriman I thought we'd get a little in the weeds during our headlines,

because this is an area of investing

we haven't talked about in a long time.

This is written by Bruce Kelly over at Investment News.

How much are non-traded REITs really worth?

A zero.

His subtitle is advisers don't like it when REIT valuations

bounce all over the place.

Bruce says during the credit crisis of 2008, the bottom fell

out of many non-traded real estate investment trusts and financial

advisors and customers learn that.

A REITs stated estimated value of what showed up on a client's account

statement and the real value, what the REIT was worth on the street

at that exact point in time.

Those two numbers could be miles apart.

Non-traded REITs are illiquid securities, meaning that they're opaque

and not priced daily by the market.

Advisors sell them to investors looking for income and yield.

In the past.

Non-traded REITs carried steep commissions, but the industry has moved

away from that compensation model.

For the past few years, but non-traded REIT valuations a decade or so

ago where at times, so shockingly incongruous from one day to the next

that advisors and clients simply learned not to put any faith in them.

Yep.

And then it goes into some of the horror stories.

CNL lifestyle properties, Inland Western, and these were some big

REITs I remember these REITs.

Some of us are still dealing with the outcomes of these.

CNL lifestyle properties launched in 2004, sold at $10 per share.

CNLs REIT board signed off on a valuation in 2015, at $5 and 20 cents a share half

of what they were selling that rate for.

True.

However, Over that 10-year period or 11 year period, you did get dividends.

Big, huge dividends.

For a little while yeah, it was gigantic.

It was like seven or 8% a year.

And then, you know, it started trending down.

So, you know, I'm not saying that it was even money by any stretch of the

imagination, but on a per share basis.

I'm also not suggesting that this is like the get out of jail free card, right?

Like at least you didn't lose that.

At least she broke even like over a 10 year period.

That's not the goal of an investment, I understand.

Get the smoke and mirrors out, get the smoke out.

Yeah.

Yeah.

That's not what I'm trying to do here, but it may not be as bad as

you think, just looking at the per share basis, considering there's

so much income that came out of it.

But if you tear that apart and you think about it, it has to have been that way.

And what I mean by that is.

When you think about an investment.

So you've got, uh, you know, a tech company, or you've got a

manufacturing company, you've got some publicly traded company.

Right?

And they make some profits.

Do they give you all the profits every year as a distribution?

No, they give you some portion of the profits or sometimes none of the profits.

And what do they say, Hey, we made these profits, but we're not getting to give

those to the shareholders this year.

We need to hang on to those because we're building a new factory or we

need to invest in this new technology, or we need to hire this workforce.

I mean, look at Amazon, they make money hand over fist.

I'm not sure that Amazon pays a dividend and if they do it's not very high.

Microsoft just paid their dividend last week or week and a half ago.

It's like 2%.

They're making more money than 2%.

So, what do they do with the difference?

They invest it.

We take a REIT on the other hand, especially early on, you

know, 20 years ago or 15 years ago with these non-traded ones.

And you go, well, how is it paying?

How can it be paying seven, eight, 9%?

And you go, well, it must be the only way it can be doing that as if it's somewhat

cannibalizing itself, or at least it's not taking some money and storing it away

for later if there's not some good years.

You know what I mean?

Kind of that seven year, seven fat year, seven lean type idea.

When they distributed all the cash every day or every year, and go

here, we made this money but here it is, you guys can have it all.

There's nothing set aside for a rainy day and then you go okay well, I get it.

It has to be kind of consuming itself along the way to be able

to provide such high dividends.

And then the market drops out 2007, 2008.

And it is what it is.

Yeah.

There's nothing left.

You know, there's nothing in the coffers to pay out the sustainable

dividends versus you look at like a publicly traded company and you go,

well, even in the darkest moments, Microsoft still pays their dividend

or Ford still pays their dividends.

Or at the very least, if they're a really strong company, they can

go buy things when they're down.

Right.

You'll see the strongest start to swallow the weak Yeah.

Yeah, you're exactly right.

I mean, they look at it from an opportunistic standpoint,

but you know, hindsight's 2020.

We don't use any non-traded REITs at all anymore for all of these reasons

because it's impossible to value.

And once these boards started putting random dollars assigned

to it, like, Oh, guess what?

Uh, now it's worth.

$5 and 10 cents.

And here's the latest thing.

So you think about like, that happened five years ago, you were

talking about here's the latest thing this year with COVID.

Yeah.

We don't think we can accurately value these right now because of COVID.

So we're just going to not do it.

That's the message from all these boards actually further down in this piece

is now you can't give me any number.

Like I get that the numbers are relatively BS along the way.

But now there's no way to like, does Zillow not work at your house?

Like I have at least a cursory knowledge what my house is worth.

So people new to this game want us to back the truck up OG and explain

really what type of investment this is.

So a REIT is a real estate investment trust.

Like Bruce said and when I was reading the piece here.

That means they buy a bunch of properties, you buy those

properties and most of the time

it trades like a stock.

However, there are a type of real estate investment trust.

Generally, what it has been in the past is before they take it public, as they're

building it, what they used to do would be these REIT companies would trade.

The fact that it's going to be illiquid for a certain amount of time with you

would help them kind of build the REIT.

So you would help them get all these properties and get it ready.

And then they would list it.

And for people that were in on non-traded REITs, the big event,

most of the time was getting listed.

Right.

They would take it and they would get it listed.

And that's when you could get your money back.

So you go into these, which worked great until the housing market

took a gigantic crappola in 2007.

Like every strategy it worked until it didn't.

And, uh, and then, and, and so, uh, people knew, they knew that, Hey, I'm

probably, if they, if they got into it for the right reasons, and you always

found people that didn't understand what the hell they were doing, because

either they decided they didn't want to learn about them or they had advisors

selling them for the wrong reasons.

Whatever it might be.

If you were in it for the right reason, you knew that you were locked away for

maybe six, seven, eight, nine, 10 years.

That was the pitch from the wholesalers, right.

Was seven years.

And you'll be good.

Yup.

Just, just promise seven years.

And a lot of the time they were out earlier, you know, people

would be out in five years.

So, um, But I just don't see any more.

I don't see any more.

Why I would put money in one of these vehicles.

I think when it's opaque and I can't see the inner workings now, and I don't

know exactly where my money's going and what these properties are really worth.

Don't get me wrong.

There might be some great deals.

And I definitely don't think a non-traded REIT is a scam, but I definitely think.

You're going to have to have a hell of a sales pitch to get me to

put some money in non-traded REIT.

Well, let me give you the shot.

So, uh, Mr.

Saul-Sehy Nah I'm just kidding.

I just don't understand it.

Especially today.

It's easy to look back and go, well, that was stupid.

Well you know, the things that we have access to and the information that we

have access to, and the history was a lot different 15 years ago than it is today.

Right?

So you made as good a decisions as you could with the

information you had at the time.

But if we're adding real estate to an investment portfolio, if you're adding

real estate to an investment portfolio, and you're a, you know, you're a new

investor or if you're a seasoned investor and you want to add real estate, I can't

see how you don't do equity real estate.

And you get the equity volatility, which is what you want, the appreciation.

You still get some pretty decent dividends.

I've just looked up an I shares ETF.

That's a US REIT and is paying 3% a year.

So not only are you getting some appreciation, every or appreciation

opportunity, I should say, which you didn't really have.

Uh, in the non-traded stuff or at least you didn't have until that

liquidity event that you were talking about, you still get some pretty

decent dividends, 3%, not too shabby.

And all of the downside of the non-traded REIT is the illiquidity.

And you eliminate that completely with a REIT or a mutual fund.

So.

If you're adding real estate to a portfolio use an ETF or mutual fund.

Stay away from the non traded stuff.

I can't, I can't see how you would use a non traded thing at all.

I can't either, but I do want to stress OG, not a scam by the way.

No, I mean, unless it was Nicholas then he.

His, his was a scam but it wasn't, uh, it was more of an accounting issue.

Yeah.

The product type is not a scam.

Like as an example, people hear junk bonds and, uh, maybe not so much

anymore, but I remember around the late nineties when I talk about junk bonds,

people go, Oh those are all a scam.

No, no, no.

There were insider traders who went to jail in that market does not mean that

junk bonds are a scam.

It means there were bad people in that arena at the time.

Um, and certainly that can happen in any arena.

I think our takeaway non-traded REIT just don't know what they

could do with the non-traded REIT.

That would make me go.

It looks like a good idea today.

I think maybe that's a type of investment.

Oh, gee, that's a, that might be an idea.

That's overshadowed by a lot of other places that might be more liquid,

less opaque, easier place for you to justify putting your money there