REITs Are Going (And Staying) Private for These Four Key Reasons

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American Campus Communities Inc. ACC, a publicly traded REIT that focuses on student housing, has recently been purchased by Blackrock, who wants to make it private. With current market conditions, some real estate investment trusts (REITs) have seen losses and are undervalued.

For example, the Dow Jones U.S. Real Estate Index is down 13% year to date. At the same time, many REITs are opting out of IPOs and choosing to remain private. More REITs are choosing to become and stay private since they want to avoid high market volatility, attract higher quality investors, save money and minimize regulation.

Avoid High Volatility in Public Markets

In 2022, the market saw a transition from a bull market to a bear market. As a result, many standard indexes including the S&P 500 and NASDAQ have realized double-digit losses at -10.69% and -18.11%, respectively.

Not all REITs are created equal, but many REITs have seen losses during this time, especially those that use significant amounts of leverage. To combat rising inflation, the federal reserve has increased the federal funds rate by roughly 2% over the course of the year. This move has caused financing to become even more expensive, reducing the profits of several REITs.

Aside from this, public REITs are subject to random market swings and doom-and-gloom financial media outlets. One of the biggest reasons that REITs are choosing to go and stay private is to avoid being subject to these outside factors.

These factors can make a huge difference in public and private REITs. Per CoStar Managing Director Hans Nordby, “as for property types, the biggest valuation gaps are occurring in the retail and office segments.” 

He also mentioned that “all in all, current valuation trends are likely to result in more public to private transactions this year.”

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Attract Higher Quality Investors

One of the main advantages of publicly traded investments is that they’re liquid, meaning it’s easy to buy and sell them. After all, investors can buy and sell REIT ETFs like Vanguard’s Real Estate Index Fund ETF VNQ commission-free and intraday.

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This liquidity is a blessing and a curse. While public REITs and REIT ETFs are liquid, they are also more susceptible to the whims of amateur, short-term investors who might panic-sell at the first sign of bad news.

Conversely, most private REITs have redemption periods — which can range from two to five-plus years — that prevent early withdrawals. These redemption periods reduce liquidity, but they also encourage investors to approach real estate investing with a long-term mindset.

Long-term investing might be more profitable according to a Macrobond study. This study found that investing for one year would have resulted in positive returns 72.7% of the time while investing for ten years would have increased this statistic to 94.15%.

Don’t miss: This High-Yield Real Estate Fund Is Targeting A 12%-18% Annualized Return

Most Private REITs Want Accredited Investors

Aside from redemption periods, many private REITs have higher minimum investments, which can range from $1,000 to $25,000. Because of these high costs, many private REITs are only available to affluent, accredited investors. 

Private REITs and other investments solely meant for accredited investors have stricter application and verification rules. For example, a potential accredited investor must prove that they have either:

  • An income over $200,000 per year (for married couples, $300,000) in the prior two years and can prove consistent income in the current year.
  • Or a net worth of at least $1 million, not including the value of a primary residence.

Conversely, many publicly traded REITs like Realty Income Corp. O trade for only $74 per share and have much lower barriers to entry.

Save Money and Time by Forgoing an IPO

IPOs can be an exciting event since they can open a REIT to the general public, providing a large source of funding. While IPOs can be extremely profitable, they can also be costly and lengthy.

For example, the average IPO takes six months and is composed of three stages — the pre-filing period, the waiting or pre-effective period and the post-effective period.

Some sample costs could include fees for underwriters, accountants, attorneys, advertising campaigns and conferences. By being publicly traded, these REITs are also subject to regulatory agencies like the SEC and FINRA. These organizations also add other costs like registration and listing fees.

Big Four tax and accounting firm PWC compiled the public filings of 829 companies and noticed that it costs companies on average 3.5% to 7.0% of gross IPO proceeds in the process.

Check out: Benzinga’s List of The Best Non-Traded REITs for 2022

Deal With Less Regulation

By not being publicly traded, private REITs aren’t registered with the SEC. These REITs are exempt from lengthy and expensive regulation standards including the Sarbanes-Oxley Act of 2002 (SOX).

SOX was created as a result of several accounting scandals in the early 2000s — including the fall of Enron — to protect investors from corporate fraud. For public companies, SOX comes with many rules like quarterly reviews and occasional audits.

Since they don’t need to comply with these regulations, private REITs can save even more money. This money can be reinvested into the business or used to increase dividends, enticing more investors.

Even More REITs May Opt Out of Being Publicly Traded

Many large hedge funds like BlackRock, Starwood and KKR are buying public, underpriced REITs to convert them into privately traded ones. At the same time, more private REITs are choosing to forgo IPOs.

By not being publicly traded, private REITs will be subject to less regulation compared to their SEC-registered counterparts. While they could miss out on investors by not being publicly traded, private REITs can compensate for this since more investors have more opportunities to invest in private real estate.

Photo by Sergii Molchenko on Shutterstock

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Posted In: REITReal EstateAlternative investmentsBlackrockKKRreal estate investingStarwood
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