Property Investors’ Latest Horror: Zombie REITs
Formerly popular nontraded REITs fall on hard times
Inland American Real Estate Trust Inc. is the kind of property company that gives some investors bad dreams. It raised $7.9 billion to buy assets it now can’t or won’t sell. The value of its holdings has plunged 60%. It has cut its dividend by three-quarters.
“It’s a zombie,” says Allan Roth, one of 170,000 shareholders of the nontraded real-estate investment trust. Instead of returning money to shareholders, the REIT is plowing proceeds from the few properties it has sold into new purchases or reducing debt, complains the financial adviser from Colorado Springs, Colo.
Nontraded REITs became popular among individual investors over the past five years with a simple proposition: buy portfolios of properties, pay annual dividends of 6% or more, then liquidate the assets and return investors’ original capital and then some. Instead of being traded on stock exchanges like traditional REITs, the funds are sold by brokers directly to investors.
Annual fundraising by nontraded REITs more than tripled between 2009 and 2013 to a record $20 billion. At the same time, funds began to return capital to investors on a faster timetable, often two to four years instead of six or eight that had been typical in the industry.
But some nontraded REITs grew so fast that they became difficult to unwind. Others overpaid for their properties and since the crash of the commercial property market have had trouble selling assets at a price that would make investors happy. Such funds became zombies.