September Issue: Investment—Gaining Ground

Non-traded REITs aim for a strong 2015 finish.
A non-listed vehicle sponsored by Griffin Capital Corp. recently bought DreamWorks Animation’s campus in Glendale, Calif., for $215 million.

A non-listed vehicle sponsored by Griffin Capital Corp. recently bought DreamWorks Animation’s campus in Glendale, Calif., for $215 million.

Non-traded REITs had a strong year for investment in 2014, and they’re on track for an encore. According to SK Research’s “Non-Traded REIT Market Intelligence Report,” which was released in August, non-traded REITs have a hearty appetite for acquisitions. In 2014, they acquired $21 billion in core commercial real estate.

According to Real Capital Analytics Inc., investment volume totaled about $9.3 billion in the first quarter. Assuming a strong finish, non-traded REITs are likely to match or exceed last year’s acquisition totals. In the early going this year, sponsors made the biggest splash in two sectors: Hospitality drew $2.2 billion in investment during the first quarter, followed by office assets, with acquisitions valued at $1.1 billion, SK Research reported. American Realty Capital Hospitality Trust dominated its category, tallying $1.8 billion in volume. The $350 million in acquisitions completed by Hines Global REIT topped the office category.

Non-listed vehicles are active in other asset categories, as well. In June, NorthStar Healthcare Income Inc. closed on a $639.3 million portfolio of continuing-care retirement centers acquired from Fountains Senior Living Holdings. Watermark Retirement Communities and The Freshwater Group Inc. will continue to operate the portfolio.
Traded and non-traded REITs alike are thriving in this robust investment climate. But non-traded REIT executives argue that there’s more to their success than the commercial real estate industry’s broad-based prosperity.
In relative terms, non-traded REITs’ acquisition volume is modest. Crossborder investment during the first half of the year totaled $38.4 billion, for example, and institutional players poured $28.4 billion into real estate assets, according to Real Capital Analytics.

Despite the gap, sponsors insist that the strategic similarities are far greater than the differences among investor categories, particularly between non-listed REITs and their public cousins. “From an investment strategies standpoint, there are no discernible advantages or disadvantages between a non-traded REIT and a listed REIT,” argued Louis Sohn, director of acquisitions for Griffin Capital Corp. “Both types of companies are in the real estate market attempting to acquire properties for the same reasons and looking for the same benefits.”

Non-listed vehicle sponsors suggest that non-traded REITs’ reputation for stability may be attracting investors. “Non-traded REITs have a much lower correlation to the broader securities market than do traded REITs, which can be subject to volatility and the whims of the market that have nothing to do with the underlying value of the real estate,” said Ella Shaw Neyland, president of Steadfast Apartment REIT. Recent Steadfast acquisitions include Bella Terra at City Center and Hearthstone at City Center in Aurora, Colo., for an aggregate price of $91 million. “Strong employment is a key driver in Steadfast’s acquisition strategy,” Neyland explained, and the Denver-area market fits the bill.

Going Public

As SK Research noted in late July, several non-traded REITs have completed IPOs on the New York Stock Exchange this year. In February, Inland American Real Estate Trust launched its former lodging affiliate under a new name: Xenia Hotels & Resorts Inc.

Richmond, Va.-based Apple Hospitality REIT Inc., which owned a 174-property portfolio at midyear, began trading on May 18. Global Net Lease (formerly known as American Realty Capital Global Trust Inc.) followed suit two weeks later. Behringer Harvard Opportunity REIT I made its NYSE debut on July 23; the office investment specialist trades as TIER REIT.

Also in the IPO pipeline is Landmark Apartment Trust Inc., which announced plans in May to list shares on the New York Stock Exchange. Landmark simultaneously announced the appointment of former Evercore Partners executive Greg Brooks as CFO and Gus Remppies’ promotion to COO.

Landmark started life as Grubb & Ellis Apartment REIT and was renamed in 2012 after a $537 million recapitalization. Today, its primary owners are Blackstone Group, Toronto-based OPSEU Pension Trust and iStar Financial Inc.

Non-traded REITs are also expanding via corporate-level acquisitions. In June, Griffin Capital bought Signature Office REIT and merged it with Griffin Capital Essential Asset REIT Inc. The combined vehicle encompasses a 70-property, 15.9 million-square-foot portfolio with a $3 billion capitalization.

“The additional scale provides us and our stockholders, including the former Signature stockholders, with greater potential to execute value-enhancing liquidity events,” noted Kevin Shields, Griffin Capital’s chairman & CEO. The portfolio is largely leased to corporate tenants like State Farm Mutual Auto Insurance Co., GE Oil & Gas Inc. and Time Warner Cable Southeast L.L.C.

Less than a month after acquiring Signature, Griffin Capital Essential Asset REIT paid $215 million for DreamWorks Animation’s headquarters campus in Glendale, Calif. The five-building, 460,000-square-foot property is fully leased to DreamWorks through 2035.

Despite their flush year, there are challenges ahead for the non-traded sector. The U.S. Department of Labor is proposing fiduciary rules that could slow down sales of alternative investments, including non-traded REITs, when used in retirement accounts. That said, it is by no means certain that the Labor Department will finish its work before the Obama administration leaves office.