The Trends: The Price of Non-Traded REITs

The price structure of non-traded hotel REITs is putting investors that are in it for the long haul at a disadvantage, according to a report from the Cornell University School of Hotel Administration’s Center for Hospitality Research titled “Non-traded REITs: Considerations for Hotel Investors.” The report argues that while REITs can be appealing buy-and-hold investments, thanks largely to their hefty dividend payouts, those payments are lower for long-term investors.“In effect, the early investors subsidize the commissions paid to the dealers who sell to late-term investors,” states the report, written by John Corgel, Robert C. Baker professor of Real Estate for Cornell’s School of Hotel Administration, and Scott Gibson, professor at the Mason School of Business at the College of William & Mary. “This effect is an unintended consequence of the fact that the REITs’ share prices are fixed, regardless of the value of the underlying assets. The REITs’ high-dividend structure mitigates the effect, but those dividends mean that some REITs’ payouts exceeded the cash they took in (as measured by funds from operations).”The structure of non-traded hotel REITs does not indicate that investors should steer clear; rather they should thoroughly examine the performance of such investment vehicles. The report offers recommendations for investing in non-traded hotel REITs, including to study the company and its management’s track record, review tax regulations, read prospectuses, assess dividend-payment policies, have a clear understanding of exit strategies and review the sponsor’s history.