The investment fraud attorneys at Stoltmann Law Offices are evaluating recent reports that the NorthStar Healthcare Income, Inc. Real Estate Investment Trust (REIT) has announced it will completely stop making distributions to investors in order to retain cash. This most recent announcement follows up on the decision in April 2018 by the NorthStar Healthcare Income to suspend investor distributions. It should come as no surprise, that as the income component of this income investment was suspended, the purported value of the shares of this non-traded REIT has also plummeted.
According to HealthCare Income REIT, its NAV, or net-asset-value, is down to $7.10 per share, an almost 30% decline from its listing price of $10 per share. Importantly, shares of HealthCare Income REIT are not publicly traded, so investors cannot simply put in an order to sell their shares and have an exchange, like the NYSE, fill an order for the sale at a bid price. Because these non-traded REITs are illiquid, if investors want to sell their shares, this can only be facilitated through secondary market auctions. According to recent secondary market sales information, shares of NorthStar Healthcare Income REIT were sold for only $4.76 per share on January 25, 2019 – a more than 50% decease from the offering price. There have been no reported sales since, and the official announcement ending distributions is sure to drive the price of this REIT down even more.
Suspending distributions, ending distributions, freezing redemptions, and share prices that rarely reach the offering price are all too common storylines with non traded REITs. Non-Traded REITs have played a prominent role in our representation of investors since 2005. Financial Advisors commonly use non-traded REITs, like the NorthStar Healthcare REIT, as a piece of the fixed-income portion of an investor’s overall portfolio. They also use these non-traded REITs to fill the part of the diversification plot as exposure to the real estate sector. Neither of these reasons is sufficient to expose investors to a traditionally underperforming asset class. The fixed-income allure of these non-traded REITS really took hold after the dust settled from the financial crisis. Due to persistently low interest rates, investors just could not get any sort of yield from traditional fixed income securities. Financial advisors began to really push non-traded REITs offering distribution rates of more than 7%, all the while allegedly protecting the principal investment with a portfolio of real estate. If this sales pitch sounds familiar and you have money stuck in the NorthStar Healthcare REIT, please call our Chicago-based securities attorneys at 312-332-4200 for a no-obligation free consultation.
The truth about non-traded REITs, including the NorthStar Healthcare REIT, is that they are very complicated investments first and foremost. Investors are not simply shareholders of a company that owns a real estate portfolio. REITs are, fundamentally, a tax vehicle for commercial real estate investors, like NorthStar. By registering as a REIT, they get many tax advantages, so long as they distribute most of the at least 90% of the taxable income generated from the underlying property portfolio to investors in the form of that distribution. The problem with this is, it is difficult to maintain the ability to pay overhead on the real estate portfolio when upwards of 90% of the cash taken in has to be distributed. This results in REITs taking on a lot of leverage or loans to sustain themselves.
The primary problem with non-traded REITs, like the NorthStar Healthcare REIT, is the lack of share price liquidity. Investors are typically stuck once they buy shares in non-traded REITs. Interestingly enough, there is an entire market of exchange-traded REITs that are just as liquid as any stock traded on the NYSE that offer similar income as non-traded REITs, but financial advisors usually don’t sell these to their clients. The reason why non-traded REITs are preferred to exchange-traded REITs boils down to one word: Commissions. Financial Advisors can get commission rates of between 7% and 12% on non-traded REITs, whereas exchange-traded REITs simply pay normal stock-like commission rates of around 1%. Historical data proves that non-traded REITs are poor, speculative investments with little upside, especially when compared to their exchange-traded cousins. Your broker sold you a non-traded REIT for one reason – extremely high commissions.
If you have money locked into non-traded REITs like the NorthStar Healthcare REIT, please contact our securities attorneys at 312-332-4200 for a no-obligation, free consultation. We represent investor-clients on a contingency fee basis and we do not get paid until you do.