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One-Man Think Tank: Inside the due diligence that uncovered serious questions about a REIT

Ron's firm convinced an investor to sell his shares after an analysis that looked at the share redemption program

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Ron Rhoades: If you read to the end of this column, you may conclude that due diligence is not easy. But whoever said being an RIA should be?


Peter P. Stefanic

Peter P. Stefanic

May 21, 2014 — 6:43 AM

First, I believe the client had too high of a concentration in REITs(the previous advisor did not do a proper job); I believe in REITs for part of my clients portfolio and only propose a max. of 25% of my clients’ investable liquid assets into alternative inv.'s and my broker-dealer won’t allow more than the 25%. The client also has to have so much in liquid assets and a min. income before they can invest in REITs. I’m not sure what REIT you are talking about, but my understanding is that all publicly non-traded REITs(and all the ones I propose to me clients) have to be appraised and re-valued (by law) 18 mos. after they close and come up with a new share price. My clients are made aware of the high fees that are paid up front and that part of their dividend can be paid from borrowings or new investors’ money coming into the REIT when they are buying a REIT and they have to sign a disclosure,stating that they are aware of this, but 100% of their inv. starts earning the dividend unlike money going into a front-end loaded mutual fund where they may lose 5.75% of their money. Yes, some REITs that investors purchased in 2005-2009 have gone down in value and have reduced their dividend because those properties were purchased at the height of the market, but some have recovered and clients have actually made a nice profit. You know what happened from 10/2007-3/09/2009 and people had lost a bunch in stocks,bonds and real estate. You also know what happened this last decade(the “lost decade”) where most people didn’t make any money in 10 yrs..Many homeowners are still underwater or even lost their homes. How many people thought their money was very safe with General Motors and now have lost it all. I just feel that you and many others give non-traded REITs a very bad name that they don’t deserve. My clients have done very well in these REITs averaging double digit returns for the last 4.5 yrs. and liquidity has not been a problem. Actually, many clients wish these REITs hadn’t executed a liquidity event so early because they have not been able to get any kind of yield anywhere else. Banks and brokerage firms are paying 0% or next to 0% on cash; CD’s,MM’s,savings accts. are paying next to 0%. The REITs that I have my clients in are paying between 6.25% and 7.75% per year in dividends(my clients know that these dividends are not guaranteed,but neither are dividends of stocks guaranteed),which is 3-3.5 times the average stock dividend of an S&P 500 stock co. and double corporate bond rates and can reinvest those dividends back into shares at a 5% discount. I know(AND MY CLIENTS KNOW) that these REITs are not very liquid,but that is why I recommend them to my clients so that they do have a non-correlated asset to the rest of their portfolio and their share price is not going up and down like a yo-yo. I just think you need to give a more balanced view of non-traded REITs. There is risk in buying them but so is there risks in buying stocks,bonds,mutual funds, and direct real estate. Investors have lost and gained in all of these investments. My clients(and me) are very happy with the performance of the non-traded REITs I have put them in and they can not find anywhere else to get the kind of income they are getting from these REITs. There will come a time within the next few yrs. when the REITs won’t be as attractive and we will stop buying them, but isn’t that the same with stocks and bonds. Again, I say, you need to give a more balanced approach like I do with all investments to my clients. Thank you for taking the time to read this.

Peter

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