Trouble is brewing with a number of nontraded real estate investment trusts (REITs) and now, investors are filing claims for their losses. One of the REITs, NorthStar Healthcare Income, Inc., suspended distributions to investors on February 1.
Closed to new subscriptions since December 2015, the publicly registered REIT was set up to acquire, originate, and oversee securities in the healthcare industry. Northstar told investors that challenges involving performance and operations had resulted in a reduced estimated value/share in 2018 compared to 2017—from an $8.50 NAV/share at the end of June 2017 to $7.10 NAV/share in December 2018.
The nontraded REIT’s board cited a number of reasons for the decrease: a cash flow affected by the senior housing market, labor costs related to the investments that have impacted the REIT’s portfolio, more cash flow issues—this one impacting the skilled nursing industry—and assets’ income losses.
In October, investors were told that shares would only be bought back in the event of qualifying disability/or death. As of early June 2019, NorthStar Healthcare Income REITs were selling at $2.50/share.
Hospital Investors Trust Assets Lose Value
Northstar isn’t the only nontraded REIT raising concerns among investors. The board of Hospitality Investors Trust (previously known as American Realty Capital Hospitality Trust/ARC Hospitality Trust) at the end of December approved $9.21 as the estimated net asset value/share for the company’s common stock—a 33.6% drop from the previous year of $13.87 per share NAV. The original share price was $25.
According to The DI Wire, the real estate assets of the REIT saw a 16.3% decline in value from the original $2.3B purchase prices. The drop was caused by a number of reasons, including a lower occupancy estimate, an “average daily rate reflecting general industry forecasts and market conditions,” a higher hotel supply in certain markets, costlier labor, other expenses, and other factors.
Sales in Hospitality Investors Trust were suspended in late 2015 after $911M in investor funds were raised. Distributions to investors were suspended in January 2017. In February 2019, the REIT suspended its Share Repurchase Program.
AFIN REIT Takes Unexpected Deep Dive
Another REIT to show a noticeable decline in value is American Realty Capital, now known as American Finance Trust (AFIN). Last July, AFIN saw an approximately 40% price drop after another REIT issued a $15 tender offer for AFIN shares that were outstanding. AFIN has continued to see its value drop, causing investors’ principal to go down. Although $25/share was the par value price, in March, AFIN’s trading price was under $11—that’s a 56% plunge.
REIT Investor Fraud Claims
Shepherd Smith Edwards and Kantas, LLP (SSEK Law Firm) is currently working with REIT investors who have suffered unexpected losses from AFIN, Hospitality Investors Trust, and Northstar Healthcare Income.
Nontraded REITs are complex, high-risk investments, and they are typically best suited for sophisticated investors and institutional investors. They are often too risky for typical retirees and retail investors.
Unfortunately, the lure of a high commission can be a strong incentive for a broker/brokerage firm to recommend that an investor buy into a nontraded REIT, even if it may not be a suitable investment for his/her portfolio, investment goals, and/or the degree of risk that the client can handle. Also, because there is no proper public marketplace for nontraded REITs, it can be hard for investors to sell their positions in these securities. This makes nontraded REITS not the best investments for customers who need a portfolio that is liquid so that they can have easy access to the cash backing their investments.
If you suffered nontraded REIT losses and you feel that you were not fully apprised of the risks involved, or the investment was unsuitable for you yet recommended by your broker anyways, you may have grounds for filing an investment fraud claim. Contact SSEK Law Firm today and ask to speak with an experienced REIT fraud attorney.
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