Rosemarie Thurston, Partner, Alston & Bird LLP
03/28/2014
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What are your expectations for public, non-listed REITs and their ability to raiseequity in 2014?
It will defi nitely be challenging to reach the levels seen in 2013, but it’s within the realm of possibility. It actually could occur if we see a high volume of successful liquidity events in 2014.
History has shown that as much as one-third to one-half of the capital that goes back to these retail investors through a liquidity event is then reinvested into another public, non-listed REIT. We understand that there’s about $45 billion worth of mature public, non-listed REIT programs that are expected to complete liquidity events in the next year or two, so if the market conditions are favorable, then we can expect to see more of that recycled capital drive growth of the industry yet again.
How do you see FINRA’s efforts to enhance public, non-listed REITs’ transparency affecting the companies and their investors?
FINRA believes that something needs to go on customer account statements to mitigate investor confusion about the underlying value of the illiquid securities purchased in a fi xed price off ering. FINRA is also concerned that investors don’t
understand that in many cases the distributions which make these products so attractive are in excess of the REIT’s earnings.
Th e new rules, as we understand where they’re going, will no longer permit the customer account statement to show the value at the gross off ering price, but at some net off ering price that refl ects a reduction for the upfront sales load, organization and off ering costs, and in cases in which distributions exceed earnings, the per-share, over-distribution amount. The customer account statement rules are a way that FINRA can enhance transparency of these value impairments.
The impact on the industry is largely uncertain, but we do think that, if the information is presented in a way that investors can understand it, the enhanced transparency will be helpful to the overall growth and longevity of the industry.
From your discussions with public, non-listed REIT CEOs, what are the main issues on their mind at the moment?
I would say regulatory uncertainty is the number one thing that these CEOs are concerned about. We’ve seen the pace of new entrants and new products slow dramatically because of the uncertainty at this time about FINRA’s customer account
statement rules. In addition, the North American Securities Administrators Association (NASAA) has proposed new regulations that would change the industry as well, making it more diffi cult for sponsors to be profitable with these products.
It’s also becoming increasingly important for sponsors to have their REITs complete successful liquidity events in order to raise money for subsequent REITs. Lastly, being able to put the money that’s being raised at this rapid clip to work quickly and wisely is always a concern in a robust capital raising environment.
What impact could a new fi duciary standard for brokers have on public, non-listed REITs?
It appears to us that this issue is probably going to be kicked into 2015, and then may actually go away as the election approaches. If a uniform fi duciary standard for all fi nancial advisors was to be passed, it could have a huge impact.
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