Non-traded REITs: New fund structures improve fees, liquidity and transparency
Non-traded REITs: New fund structures improve fees, liquidity and transparency
NAV REITs now account for 99.9% of fundraising for NTRs as demand climbs
KEY TAKEAWAYS
- Non-traded REITs (NTRs) are climbing in popularity, with a surge in product launches, as investors seek diversification, enhanced performance and income potential through alternative investments.
- A new generation of NTRs—managed by large, established firms—offers periodic liquidity, greater transparency, and lower fees and commissions than earlier NTR launches that have received significant regulatory scrutiny.
- Consistent with our belief that investors should have strategic allocations to both private and listed real estate, Cohen & Steers has launched a non-traded REIT, the Cohen & Steers Income Opportunities REIT.
Defining the differences between lifecycle and NAV REITs
Investor interest and assets under management in non-traded REITs (NTRs) have climbed significantly in recent years.
Three main drivers lie at the heart of this trend: 1) investor calls to diversify their portfolios with alternatives (such as private real estate), 2) a continued and growing demand for attractive total returns, particularly through current income, and 3) the pedigree of current managers and increased access to and use of NTRs among wealth advisors.
At the same time, investors have grown more confident in the structure of NTRs, represented by a new generation of launches in the past several years. By comparison, the earlier generation of NTRs drew significant scrutiny. We believe the differences between the earlier vehicles known as lifecycle REITs and the newer vehicles known as Net Asset Value (NAV) REITs warrant clarification and comparison.
The Securities and Exchange Commission issued an Investor Bulletin in 2015 cautioning investors about the risks of what is now the previous generation of NTRs, including their low liquidity, high fees and lack of transparency.
The asset management industry took note and looked to address these concerns by building a new generation of NTRs that seek to offer periodic liquidity, greater transparency, and lower fees and commissions. In fact, NAV REITs now account for 99.9% of all NTR fundraising, according to Robert A. Stanger & Company, which tracks the industry (Exhibit 1). It should be noted that NAV REITs should still be considered as having limited liquidity and they may be illiquid at times.
EXHIBIT 1
Next-generation NTRs now dominate fund raising
This sales and advertising literature does not constitute an offer to sell nor a solicitation of an offer to buy or sell securities. An offering is made only by the prospectus. This material must be read in conjunction with the Cohen & Steers Income Opportunities REIT, Inc. prospectus in order to fully understand all of the implications and risks of the offering of securities to which the prospectus relates. A copy of the prospectus must be made available to you in connection with any offering, and is available at www.cnsreit.com.
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Lower fees
The SEC, in its 2015 report, cautioned investors that lifecycle NTRs charged high upfront fees that represented up to 15% of the offering price. Those upfront fees were typically compensation for a firm or individual for selling the NTR. Ongoing service fees also reduced investor returns as did acquisition fees that charged a percentage of the value of assets the portfolio acquired or disposition fees that were charged when a property was sold.
The new generation of NAV REITs has decidedly lower fees, driven by lower upfront sales commissions and limits on ongoing servicing fees. In fact, each of the NTRs launched since 2016 (considered the point at which the new product structure took hold) offer multiple share classes, some with high initial investment requirements, with no selling commissions and significant limits on stockholder servicing fees. And more than 55% of all NTR sales in 2021 and 2022 combined had an effective maximum sales load of just 0.4%, according to Stanger.
New structure for liquidity
NTRs, by definition, are intentionally less liquid compared to listed REITs. NTR liquidity generally occurs at NAV, while liquidity in listed REITs is based on stock-exchange values, which can be lower or higher than NAV. However, NAV REITs employ new structures that allocate portions of their portfolios specifically to accommodate additional periodic liquidity while seeking to minimize drag on returns.
That structure contrasts with the earlier generation of lifecycle NTRs where redemptions, other than those allowed for death and disability, often came at a discount to their value or had other significant limitations. To get their full value, investors often had to wait to redeem until the fund was liquidated or listed on an exchange. The SEC, in its bulletin, cautioned that “investors with short time horizons or who may need to sell an asset to raise money quickly may not be able to do so with shares of a non-traded REIT.”
Monthly or quarterly repurchase programs offered by NAV REITs provide periodic liquidity to investors, subject to certain limitations, without requiring the sales of assets or a corporate liquidity event. What’s more, perpetual, open-ended structures provide more favorable terms and better alignment with investor interests.
While the newer NAV REITs offer more periodic liquidity opportunities, it is very important to treat these as long-term investments within an overall portfolio. That understanding is important to investment success in less or illiquid asset classes and vehicles, such as private real estate.
NAV REITs balance the periodic, limited liquidity with redemption limits designed to prevent managers from having to liquidate significant real estate holdings at deeply discounted prices to meet shareholder redemptions. In general, NAV REITs limit monthly redemptions to 2% and quarterly redemptions to 5% of the funds’ NAV.
The new generation of NTRs has decidedly lower fees, driven by lower upfront sales commissions and limits on ongoing stockholder servicing fees.
NTRs are intended only for investors with the financial means to hold their investments for relatively long periods of time, including during times of market stress and illiquidity. Consequently, we believe these controlled monthly redemptions balance investors’ need for ongoing liquidity with limits designed to help to prevent forced sales.
NAV REIT redemption terms generated headlines at the end of 2022 as some prominent funds experienced declining inflows and accelerating redemption requests. In our view, these funds’ redemption limits worked as intended, prorating available liquidity to investors while allowing the portfolio managers to maintain a long-term focus and not sell assets at distressed prices.
More transparency
NAV REITs seek to improve transparency by offering investors regular, fair and accurate share valuations, often provided by external, independent parties.
By contrast, the SEC cautioned in 2015 that share valuations were based on “periodic or annual appraisals of the properties owned by the non-traded REIT, and therefore may not be accurate or timely.”
The difference with NAV REITs is that monthly NAV pricing and detailed NAV reporting are supported by independent appraisers.
Stronger oversight
NAV REITs provide increased transparency (including more frequent and reliable valuations) over previous iterations. They are also being led by established, global firms with multiple layers of governance, including independent auditors and external appraisals as well as risk, trading and valuation committees. The growing popularity of NTRs within wealth channels also means NTRs are under much greater scrutiny and are expected to perform more rigorous due diligence.
EXHIBIT 2
The evolution of the non-traded REIT
The Cohen & Steers Income Opportunities REIT
Cohen & Steers believes that investors should have strategic allocations to both private and listed real estate. In fact, our analysis shows that a portfolio can be optimized when it includes allocations to private and listed real estate.
Private real estate also began to reprice starting in late 2022 amid slower growth and rising financing costs. We believe this will create a multi-year period of markdowns and entry points for investors.
Against this backdrop, Cohen & Steers has launched a non-traded REIT, the Cohen & Steers Income Opportunities REIT, Inc. (CNSREIT). CNSREIT’s strategy will seek to capitalize on market opportunities driven by cyclical and secular shifts in real estate usage and identify undervalued assets across all property types, sectors and geographies.
The structure of CNSREIT is largely aligned with the industry’s most recent launches, which we believe improve upon previous NTR iterations (from roughly a decade ago) by offering lower fees, improved liquidity features and greater transparency.
Like most other modern NTRs, CNSREIT will seek to offer monthly repurchases to provide limited liquidity, monthly NAV pricing and detailed NAV reporting, and independent appraisals.
However, CNSREIT’s policies and structure differ from those of its peers in several significant ways, including:
CNSREIT’s valuation policy
CNSREIT valuations begin with a third-party independent valuation advisor; valuations are then reviewed by Cohen & Steers. A third-party appraisal firm will complete an appraisal annually, and the separate independent valuation advisor will prepare an appraisal monthly.
We believe starting with an independent valuation—an external view that leverages wider market intelligence—helps facilitate consistent and unbiased appraisals.
CNSREIT’s redemption and liquidity policy
CNSREIT’s redemption policy is similar to that of offerings in the broader NTR market, in general. The underlying holdings are infrequently traded or illiquid, and the structure was designed to offer liquidity to investors through periodic repurchases up to pre-defined limits. Monthly redemptions in CNSREIT may be limited to 2% of the fund’s NAV and 5% of its NAV over one quarter.
This compares closely with the industry’s most recently launched NTRs.
However, CNSREIT’s approach differs in the way listed securities are managed within the portfolio. Similarly to other NTRs, the fund will be able to invest up to 20% of the portfolio in real estate–related securities(1) to help manage liquidity.
Within this allocation, we plan to invest in listed REIT equity securities, where Cohen & Steers has more than 35 years’ investment experience, as well as preferred and debt securities, where we have a 20-year investment track record. We believe an active allocation to listed real estate securities can offer enhanced return, additional sources of liquidity and additional diversification, and we see this as a key differentiator for CNSREIT.
The fund will also utilize listed REITS to capitalize on market dislocations and express proprietary investment views, as a complement to our direct property holdings.
Fees
Full information about the Cohen & Steers Income Opportunities REIT’s fees can be found in our summary of terms and in the fund’s prospectus. Financial advisors should discuss with their clients what share classes are appropriate.
We believe the fund’s fees have several notable features, which we have designed for shareholder alignment and long-term growth. These include a twelve-month fee waiver(2) and reduced management fee for two years(3) for certain asset classes (Exhibit 3).
EXHIBIT 3
How Cohen & Steers Income Opportunities REIT fees differ from peers
(a) Established NTR market for comparison refers to currently effective REITs published in the Stanger Report, a quarterly publication from Robert A. Stanger & Co., as of 12/31/22. (b) The Advisor has agreed to waive its fees or reimburse expenses of the Fund so that certain of the Fund’s expenses will not exceed 0.50% of net assets (annualized).
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FURTHER READING
What we believe investors should know about Non-Traded REIT redemptions
December 2022 | 11 mins
Recent redemption limits placed on some notable Non-Traded REITs (NTRs) are generating headlines, but we believe there are several points investors may be missing. We do not think this reflects broad economic or systemic risk. Rather, this demonstrates how, as expected, listed real estate typically leads the private market in both selloffs and recoveries.
Read why we believe recent news that NTRs limited redemptions underscores the opportunity we see in listed real estate.
Index definitions and important disclosures
(1) Target allocation may include listed real estate common equity, preferred equity and debt (including corporate debt and mortgage-backed securities), including, but not limited to, such instruments issued by listed and private REITs, and other real estate-related companies, with the potential to access non-core market sectors that we believe are complementary to our private core-yield investments. (2) The Advisor has agreed to waive its management fee for 12 months following the date of effectiveness. (3) During the twenty-four-month period beginning on the date of the commencement of the offering (the “initial founder shares offering period”), the Class F-S shares, Class F-D shares Class F-T shares and Class F-I shares (collectively, the “founder shares”) will be offered to all investors in this offering, subject to the minimum investment requirement for each founder shares class as described herein. Following the initial founder shares offering period, the founder shares will be offered only to investors that held, or clients of a financial intermediary that in the aggregate held, at least $150,000,000 in founder shares as of the end of initial founder shares offering period (the “minimum founder shares holding requirement”), unless such minimum founder shares holding requirement is waived by the Dealer Manager. The minimum founder shares holding requirement does not apply to purchases made by holders of founder shares under our distribution reinvestment plan. We reserve the right to extend the initial founder shares offering period in our sole discretion.
Terms summarized herein are for informational purposes and qualified in their entirety by the more detailed information set forth in CNSREIT’s prospectus. You should read the prospectus carefully prior to making an investment. There is no guarantee that any investment objective above will be realized.
Select broker-dealers will have different standards to determine the appropriateness of this investment for each investor. Individual broker-dealers may not offer all share classes and/or may offer CNSREIT at a higher minimum initial investment.
This sales and advertising literature does not constitute an offer to sell nor a solicitation of an offer to buy or sell securities. An offering is made only by the prospectus. This material must be read in conjunction with the Cohen & Steers Income Opportunities REIT, Inc. prospectus in order to fully understand all of the implications and risks of the offering of securities to which the prospectus relates. A copy of the prospectus must be made available to you in connection with any offering.
Prior to making an investment, investors should read the prospectus in its entirely, including the “Risk Factors” section therein, which contains the risks and uncertainties that we believe are material to our business, operating results, prospectus and financial condition.
Neither the Securities and Exchange Commission (“SEC”), the Attorney General of the State of New York nor any other state securities regulator as approve or disapproved of these securities or determined if the prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Offering Terms and Fees
Terms summarized herein are for informational purposes and qualified in their entirety by the more detailed information set forth in CNSREIT’s prospectus. You should read the prospectus carefully prior to making an investment.
Distributions are not guaranteed and will be at the Board’s discretion. Distributions may be funded from sources other than cash flow from operations, including, without limitation, the sale of or repayments under our assets, borrowings, return of capital or offering proceeds (including from sales of our common stock or Operating Partnership units to the Special Limited Partner (each term as defined in the prospectus), and distributions may also be funded at least in part, indirectly, due to expenses paid on our behalf by the Advisor pursuant to the Expense Limitation and Reimbursement Agreement, which may be subject to reimbursement to the Advisor, and other temporary waivers or expense reimbursements to the Advisor or its affiliates, that may be subject to reimbursement to the Advisor or its affiliates. We have no limits on the amounts we may pay from such sources.
Temporary waivers or expense reimbursements borne by the Advisor or its affiliates, that may be subject to reimbursement to the Advisor or its affiliates, and the repayment of any amounts owed to CNSREIT’s affiliates may reduce future distributions to which an investor would otherwise be entitled.
Risk Factors
Cohen & Steers Income Opportunities REIT, Inc. (“CNSREIT”) is a newly organized corporation formed to invest primarily in high quality, income-focused, stabilized assets within the United States. This investment involves a high degree of risk. You should purchase these securities only if you can afford the complete loss of your investment. You should read the prospectus carefully for a description of the risks associated with an investment in CNSREIT. These risks include, but are not limited to, the following:
- We have no prior operating history, and there is no assurance that we will achieve our investment objectives.
- Because this is a “blind pool” offering, you will not have the opportunity to evaluate our future investments before we make them.
- Since there is no public trading market for shares of our common stock, repurchase of shares by us will likely be the only way to dispose of your shares. Our share repurchase plan will provide stockholders with the opportunity to request that we repurchase their shares on a monthly basis, but we are not obligated to repurchase any shares and may choose to repurchase only some, or even none, of the shares that have been requested to be repurchased in any particular month in our sole discretion. In addition, repurchases will be subject to available liquidity and other significant restrictions. Further, our board of directors may make exceptions to, modify or suspend our share repurchase plan if, in its reasonable judgment, it deems such action to be in our best interest and the best interest of our stockholders, such as when repurchase requests would place an undue burden on our liquidity, adversely affect our operations or risk having an adverse impact on us that would outweigh the benefit of repurchasing our shares. Our board of directors cannot terminate our share repurchase plan absent a liquidity event that results in our stockholders receiving cash or securities listed on a national securities exchange or where otherwise required by law. As a result, our shares should be considered as having only limited liquidity and at times may be illiquid.
- We are a perpetual-life REIT. While we may consider a liquidity event at any time in the future, we are not obligated by our charter or otherwise to effect a liquidity event at any time.
- We cannot guarantee that we will make distributions, and, if we do, we may fund such distributions from sources other than cash flow from operations, including, without limitation, the sale of or repayments under our assets, borrowings, return of capital or offering proceeds (including from sales of our common stock or Operating Partnership units to the Special Limited Partner (each term as defined in the prospectus), and distributions may also be funded at least in part, indirectly, due to expenses paid on our behalf by the Advisor pursuant to the Expense Limitation and Reimbursement Agreement, which may be subject to reimbursement to the Advisor, and other temporary waivers or expense reimbursements to the Advisor or its affiliates, that may be subject to reimbursement to the Advisor or its affiliates. We have no limits on the amounts we may pay from such sources.
- The purchase and repurchase price for shares of our common stock are generally be based on our prior month’s net asset value (“NAV“) and are not based on any public trading market. While there will be independent valuations of our properties from time to time, the valuation of properties is inherently subjective and our NAV may not accurately reflect the actual price at which our properties could be liquidated on any given day.
- We have no employees and are dependent on the Cohen & Steers Capital Management, Inc. (the “Adviser”) to conduct our operations. The Adviser will face conflicts of interest as a result of, among other things, the allocation of investment opportunities among us and other Cohen & Steers Accounts (as defined in CNSREIT’s prospectus), the allocation of time of its investment professionals and the fees that we will pay to the Adviser.
- Principal and interest payments on any borrowings will reduce the amount of funds available for distribution or investment in additional real estate assets.
- There are limits on the ownership and transferability of our shares.
- This is a “best efforts” offering. If we are not able to raise a substantial amount of capital in the near term, our ability to achieve our investment objectives could be adversely affected.
- If we fail to qualify as a REIT and no relief provisions apply, our NAV and cash available for distribution to our stockholders could materially decrease.
- While our investment strategy is to invest in income-focused stabilized private real estate with a focus on providing current income to investors, there is no guarantee that we will achieve this strategy and an investment in us is not an investment in a fixed income instrument.
- The acquisition of investment properties may be financed in substantial part by borrowing, which increases our exposure to loss. The use of leverage involves a high degree of financial risk and will increase the exposure of the investments to adverse economic factors.
- Investing in commercial and other private real estate assets involves certain risks, including but not limited to: tenants’ inability to pay rent; increases in interest rates and lack of availability of financing; tenant turnover and vacancies; and changes in supply of or demand for similar properties in a given market.
- Substantial risks are involved in investing in real estate and real estate-related securities more generally. An unstable geopolitical climate and central bank policies could have a material adverse effect on general economic conditions, market conditions and liquidity. Additionally, a serious pandemic or natural disaster could severely disrupt global, national and/or regional economies, as experienced most recently after the
March 2020 outbreak of COVID-19. Renewed outbreaks or the outbreak of new epidemics could result in health or other government authorities requiring the closure of offices or other businesses, including office buildings, retail stores and other commercial venues and could also result in a general economic decline.
Forward-Looking Statement
This material contains forward-looking statements within the meaning of the federal securities laws. These forward- looking statements can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” “identified” or other similar words or the negatives thereof. These may include our financial projections and estimates and their underlying assumptions, statements about plans, objectives and expectations with respect to future operations, statements with respect to acquisitions, statements regarding future performance and statements regarding identified but not yet closed acquisitions. Such forward-looking statements are inherently uncertain and there are or may be important factors that could cause actual outcomes or results to differ materially from those indicated in such statements. We believe these factors also include but are not limited to those described under the section entitled “Risk Factors” in the CNSREIT prospectus. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this document (or CNSREIT’s public filings). Except as otherwise required by federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise.
Dealer Manager
Cohen & Steers Securities, LLC (“CSS”) is a broker-dealer whose purpose is to distribute Cohen & Steers managed or affiliated products. CSS provides services to affiliates, not to investors in its funds, strategies or other products. CSS will not make any recommendation regarding, and will not monitor, any investment. As such, when CSS presents an investment strategy or product to an investor or a prospective investor, CSS does not collect the information necessary to determine-and CSS does not engage in a determination regarding-whether an investment in the strategy or product is in the best interests of, or is suitable for, the investor. You should exercise your own judgment and/or consult with your own investment professional to determine whether it is advisable for you to invest in any Cohen & Steers strategy or product. CSS will not provide the kinds of financial services that you might expect from another financial intermediary, such as overseeing any brokerage or similar account. For financial advice relating to an investment in any Cohen & Steers strategy or product, contact your own financial professional.
NAV Calculation
Calculation of our net asset value (“NAV”) is intended to be a calculation of the fair value of our assets less our outstanding liabilities and will likely differ from the book value of our equity reflected in our financial statements. Because fair value calculations will involve significant professional judgment in the application of both observable and unobservable attributes, the calculated fair value of our assets may differ from their actual realizable value or future fair value. Return information may be impacted if assumptions utilized to calculate NAV different than actual realized values. While we believe our NAV calculation methodologies are consistent with standard industry practices, there is no rule or regulation that requires we calculate NAV in a certain way. NAV is not a measure used under GAAP and the valuations of and certain adjustments made to our assets and liabilities used in the determination of NAV will differ from GAAP. Please refer to “Net Asset Value Calculation and Valuation Guidelines” in CNSREIT’s prospectus, which describes our valuation process and the independent third parties, including an independent valuation advisor, who assist in the valuation process.