REIT's Guaranteed

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gettingstarted's picture
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Joined: 2009-09-25

I'm not licensed yet to sell REIT's but I have a client who has some in their portfolio and they are unhappy because they have been frozen and can't liquidate any of their position and the dividend has been decreased and has went from monthly to quarterly.  They aren't happy.Their broker then has sent them another REIT offering with Cornerstone - he is telling them it is Guaranteed 7% for 3 years and then they can take their money out... I've read over the prospectus and I don't think anything is guaranteed.Can someone who has experience with them help me out?Thanks in advance.

Baldy McGrindy's picture
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Joined: 2009-10-01

No it is not guaranteed.  It may have a 3 year buy back CDSC schedule but even that isn't guaranteed.  The dividends can go up or down depending on how well the REITs occupancy and cap rates are. 
All in all the nontraded REITs have been very successful.  the REIT they own (I'm assuming based on your descrption) that isn't doing so hot is Inland Western and it has had a few issues.   Inland is still a great company but yeah, it kind of does suck how that one has played out.  I've never heard of Cornerstone but none of them are guaranteed.  Alot of the new issue ones though shouldn't have the liquidity issues that Inland had because they don't have any debt to refinance.  I would make sure the client doesnt have more than 20% of their portfolio in the REITs.  They are great diversification tools to use for stability but this broker isn't disclosing it correctly if he's saying it's guaranteed. 
 
Most clients that have a bitter taste in their mouth from Inland Western likely aren't going to buy more of a nontraded REIT.  And that's too bad because their are some good ones out there paying 6.5+%. 

gettingstarted's picture
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Joined: 2009-09-25

Inland Western it is.the new one is Cornerstone Realty - i think its from Pacific something... i'll check.He told them it was 7% and in 3 years they can liquidate all their money...  guaranteed.

Primo's picture
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Joined: 2009-11-18

gettingstarted wrote:Inland Western it is.the new one is Cornerstone Realty - i think its from Pacific something... i'll check.He told them it was 7% and in 3 years they can liquidate all their money...  guaranteed.

 
I think this is a good example of something a client sues over.  I bet he was told intitial rate of 7% with the option for guarnateed liquidity @ FMV in 3 years.  What he heard was gauranteed 7% with option for return of principal in 3 years.

gettingstarted's picture
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Joined: 2009-09-25

Yep, I read the prospectus and it says after 3 years they will pay 100% of share price and you can liquidate your shares, but there are conditions - the board could freeze liquidation, and only 5% of total shares can be liquidated,etc... lots of ways out to keep your money.  It even says they can lower the payout or change frequency....

Baldy McGrindy's picture
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gettingstarted wrote:Yep, I read the prospectus and it says after 3 years they will pay 100% of share price and you can liquidate your shares, but there are conditions - the board could freeze liquidation, and only 5% of total shares can be liquidated,etc... lots of ways out to keep your money.  It even says they can lower the payout or change frequency....
 
Gettingstarted, Here is what I would do if I were in your position:  Don't attack the product when you meet with this client.  Many of these REITs are very good investments and will continue to be so in the future.  They probably are a bit sour from Inland Western and thats fine.  I would go over with them that the REITs are not guaranteed in any way which they should be well aware of given the whole Inland Western scenario.  And that this advisor is not disclosing this investment correctly and that's why you should be their main man.  If that other advisor has other assets over and above the Inland, get them to move it to you now.  This other advisor obviously has his some integrity issues and is not selling honestly.  

dashover's picture
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Joined: 2009-10-07

The only thing guaranteed is death and taxes; I would remove the word "guaranteed" form your vocab and replace it with "should"... or decent probability...My 2c

3rdyrp2's picture
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Joined: 2008-11-13

On another note, just got an e-mail today from KBS letting us know that KBS REIT I is lowering their share price from $10.00 to $7.17.  They were pretty heavy in the mezzanine loans but that doesn't add to my confidence in commercial real estate right now.

Squash1's picture
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Joined: 2008-11-19

I think it is a great opportunity for newer REITS... A lot of these older ones are going to have tor refinance debt, and may have to dump properties if they can't... I like KBS II and CCP III(can't go wrong with walmart and walgreens as tenants)

Baldy McGrindy's picture
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Joined: 2009-10-01

Squash1 wrote:I think it is a great opportunity for newer REITS... A lot of these older ones are going to have tor refinance debt, and may have to dump properties if they can't... I like KBS II and CCP III(can't go wrong with walmart and walgreens as tenants)
 
Totally true.  As for KBS, they haven't sold any properties and the revaluation is simply a true repricing of where property values are at now.  They're still 91% occupied and maintaining the same dividend.  The new REITs are in great positions to be buying disstressed properties dirt cheap and bring great returns over the next 5-7 years.  And by then, hopefully some of these older ones getting their teeth knocked in right now (Inland Western, Hines, KBS) will be back to original $10 in 5 years and provide some liquidity to shareholders that are upset. 

Squash1's picture
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Joined: 2008-11-19

I still think Inland American will be ok...That is a wanted REIT because of all the different properties in one REIT.

3rdyrp2's picture
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Joined: 2008-11-13

Baldy McGrindy wrote:Squash1 wrote:I think it is a great opportunity for newer REITS... A lot of these older ones are going to have tor refinance debt, and may have to dump properties if they can't... I like KBS II and CCP III(can't go wrong with walmart and walgreens as tenants)
 
Totally true.  As for KBS, they haven't sold any properties and the revaluation is simply a true repricing of where property values are at now.  They're still 91% occupied and maintaining the same dividend.  The new REITs are in great positions to be buying disstressed properties dirt cheap and bring great returns over the next 5-7 years.  And by then, hopefully some of these older ones getting their teeth knocked in right now (Inland Western, Hines, KBS) will be back to original $10 in 5 years and provide some liquidity to shareholders that are upset. 
 
Yep, agree 100%.  The main thing to worry about in the meantime is the clients getting their statements and seeing their REIT's that were not supposed to have volatile share price suddenly 29% lower.  In 5 years it won't matter though.  I'm glad the dividends are still based off of the $10/share cost, and not the current $7.17/share price.  KBS I mean.

Baldy McGrindy's picture
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Joined: 2009-10-01

Squash1 wrote:I still think Inland American will be ok...That is a wanted REIT because of all the different properties in one REIT.
 
I don't think American is out of the woods on repricing.  A good chunck of their portfolio is hotel/lodging properties that are one of the worst performing assets in that market.  I hope it doesn't get repriced down but who knows. 

Squash1's picture
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Joined: 2008-11-19

Probably not, but I bet some of the caps will change(lower)

theironhorse's picture
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Joined: 2007-03-03

Squash1 wrote:I think it is a great opportunity for newer REITS... A lot of these older ones are going to have tor refinance debt, and may have to dump properties if they can't... I like KBS II and CCP III(can't go wrong with walmart and walgreens as tenants)
 
 
agree completely.  been using AR Capital a bit lately.  great time to be buying QUALITY in the real estate market.

Squash1's picture
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Joined: 2008-11-19

Cap rates to my knowledge are based on the differences between interest rates and market returns.
 
But with low interest rates the insurance company has greater liability.
 
Also since 1950 with an 8% cap on the s&P 500 has had a result of 5.1% almost indentical to the 5.2% "risk free rate" of t-bills over the same period.

Squash1's picture
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Joined: 2008-11-19

I use them i think they are good for a portion of a clients money...
 
Where is my conflict..

REITME's picture
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Joined: 2010-02-25

New REIT programs could be good, but look carefully at dividend quality.  KBS and Inland Western are only two of many that have shut down their share repurchase programs; Hines just closed it's repurchase program and will likely revalue its shares in the next couple of months.  Inland Western's valuation looks suspect:http://www.reitwrecks.com/forum/viewtopic.php?f=2&t=7

gettingstarted's picture
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Joined: 2009-09-25

Inland Western has dropped to $6.85 a share...

chief123's picture
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Joined: 2008-10-28

Quote:Inland Western has dropped to $6.85 a share... 
 
Product of buying at the wrong time(not that anyone knew).. Just like buying tech at the wrong time before the internet crash..
 

B24's picture
B24
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Joined: 2008-07-08

Advisors should not invest in REIT's unless they know something about real estate investing.  This is not like buying an index fund or something.  I have talked to other advisors about REIT's that had no f-ing idea what they were talking about, and then wonder why NAV's dropped at of the sky.  They couldn't explain it to their clients, they never set up their clients properly, etc.  Buying a REIT should be like buying a house.  Ask your client if they are concerned about the value of their house today, if they plan on living their the next 30 years.Personally, I think non-public REIT's should only be avaliable to accredited investors.  Small-time investors usually can't comprehend the issues involved with real estate.The electronic age has made investing a pain in the a$$.  Clients crying about the value of their brokered CD's, the fluctuation in bond prices, REIT's being revalued, etc.  Incidentally, I would stay the he!! away from any REIT's that has even a small allocation to hotels.  There are only a select number of people that make money on hotels, and it's ALL about the deal.  Money is made when you buy and when you sell the property.  Everything in between is just noise.  Get in at the right CAP, get out at the right CAP, don't get caught in a downdraft.  It ain't easy.  And with so many distressed properties out their right now, existing REIT's are in trouble.  If borrowing costs start to go up, balloon payments coming due, refinancing will either be tough or non-existant, and it minimum EXPENSIVE.  The easy money train left the station a while ago.  But for those that are opportunistic, there will be lots of money made in hotels the next few years (on the BUY side of the transaction, high CAPS, still in a downdraft).

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