Non-traded real estate investment trusts experienced their lowest annual capital raise since 2004 last year, according to the most recent non-traded REIT report issued by Summit Investment Research, a research and due diligence firm founded by Michael Stubben.
In 2016, non-traded REITs raised a total of $4.8 billion, compared to $10.2 billion in 2015, $15.7 billion in 2014, and $20 billion in 2013. Modified and no-commission shares ballooned in 2016 to 56 percent of all equity raised, compared to just 10 percent in 2015, and 3 percent in 2014.
Sales continued to drop following the abrupt exit of the industry’s largest REIT sponsor, American Realty Capital (now known as AR Global), and regulatory uncertainty stemming from FINRA’s 15-02 and the Department of Labor’s fiduciary rule.
Blackstone REIT, which was declared effective by the Securities and Exchange Commission at the end of August 2016, is the new top player in the non-traded REIT space, raising $279 million in the fourth quarter of 2016. Jones Lang LaSalle Income Property Trust came in second with $153 million raised during the quarter, followed by Industrial Property Trust with $129 million.
Total invested assets increased slightly in 2016 and ended the year at $76.4 billion, compared to $75.2 billion in 2015, and $76.5 billion in 2014.
Acquisition cap rates continued to compress in 2016 after seven straight years of compression to a record low 6.3 percent. Low interest rates, the key driver for cap rate compression, increased to 3.7 percent in 2016.
Average distribution rates continued to decline in 2016 to 4.8 percent, dipping below 5 percent for the first time since 2010. In 2015, distribution rates averaged 5.0 percent compared to the 2014 average of 5.4 percent.
Distribution coverage ratios continued to improve over the last two years, reaching 97 percent in both 2016 and 2015. In 2014, distribution coverage ratios fell to 80 percent – the lowest since 2010. Summit noted that the strong coverage ratios were to due lower distribution rates and higher modified funds from operations yields.
According to Summit, the top three performing open REITs based on distribution coverage and distribution sustainability are Hines Global REIT II (5.84 distribution rate and 119 percent MFFO coverage), Griffin Capital Essential Asset REIT II (5.5 percent distribution rate and 108 percent MFFO coverage), and Industrial Property Trust (5.18 distribution rate and 110 percent MFFO coverage).
The distribution rate is the annualized distribution rate on common or Class A shares as of December 31, 2016. The MFFO coverage represents the percent of the distribution that is covered by modified funds from operations for the fourth quarter of 2016.
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.