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Non-Traded REITs Continue to Struggle in 3Q17

Non-traded real estate investment trusts raised a total of $782 million in capital in the third quarter of 2017, bringing the year-to-date total to $3 billion, according to the latest Non-Listed REIT Market Snapshot issued by research and due diligence firm Summit Investment Research.

According to the report, non-traded REIT fundraising has plummeted since its $20 billion peak in 2013 due to regulatory changes and industry sponsor AR Global’s scandal-fueled exit from the space. In 2016, non-traded REITs raised a total of $4.8 billion in equity, which at the time was the lowest annual raise in the last 12 years.

Summit noted that “Non-traded REIT sponsors will need to adapt to regulatory changes and a market transition with revised product structures and reduced fees to return to long-term equity growth.”

Private equity giant The Blackstone Group (NYSE: BX) entered the space with its Blackstone Real Estate Income Trust, which broke escrow at the first of the year and has since garnered 45 percent of the market with a staggering $353 million raised in the third quarter 2017 and $1.2 billion year-to-date.

Carter Validus Mission Critical REIT II was the second highest fundraiser in the third quarter with $118 million raised, followed by Griffin-American Healthcare REIT IV with $75 million raised.

Cap rate compression, which highlights commercial real estate price increases, is driven by interest rates on new debt. Cap rates continued to decline for the eighth straight year, reaching a new low of 6.2 percent in the third quarter, which is a 27 percent decline from 2010. Year-to-date, average interest rates on new permanent debt have increased from 3.7 percent to 3.9 percent since last year.

Occupancies for non-listed REITs remained at 93 percent in the third quarter, while average lease terms increased slightly to 7.9 years from 7.8 years last quarter.

Summit reported that the leverage ratio for non-listed REITs increased to a moderate 42 percent from 38 percent in 2016, which is comparable to listed REITs. Variable debt ratios dropped slightly to 36 percent in the third quarter of 2017, the lowest level since 2014. However, this is more than double the 17 percent variable debt ratio in 2012.

Reinvested distributions represent a significant source of equity capital for non-traded REITs, with $354 million raised in through distribution reinvestment programs during the third quarter. This is a slight decrease compared to the $365 million raised last quarter and $383 million raised year-over-year.

Share redemptions remained high over the last two years, with $319 million in shares redeemed during the third quarter of 2017. Most non-traded REITs cap annual share redemptions at 5 percent of outstanding shares, and Summit noted that some closed non-listed REITs have closed their share redemption programs or are hitting their quarterly share redemption limits. Non-traded REITs have redeemed a record $1.5 billion in equity over the trailing four quarters.

Summit Investment Research has been active since April 2016 and covers non-traded REITs, business development companies, interval funds, and listed REITs (that acquired non-traded REITs or were once non-traded). The company’s research is utilized by financial advisors, registered investment advisors, broker-dealers, sponsors, service providers such as law firms, due diligence firms, industry organizations, and news organizations, and institutions.

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