Six years in a non-traded REIT for 2.4% a year after everything

Closing this position out taught me more than holding it did, so here's the whole arc.

Bought in 2018 through an advisor. 60k, Class A shares of a public non-traded REIT, diversified, heavy on suburban office and grocery-anchored retail with a smaller industrial piece. Upfront selling commission and dealer manager fee together took about 8.5% off the top, so my 60k bought roughly 54.9k of actual NAV on day one. I knew that going in and told myself a long hold would amortize it. That part was true in principle.

Distributions ran 5.5% to 6.2% annualized on the offering price for the first three years. I took them in cash, about 3.3k a year. In 2020 the distribution was cut to 3.1% and stayed there for two years, then partially recovered to 4.4%. Total distributions across six years came to roughly 18.9k.

The NAV story is where it went. Published NAV per share was 25.00 at purchase, peaked around 26.40 in 2019, and was 22.15 when I submitted for repurchase last year. Office was the problem and everyone knows office was the problem. My mistake was that I never looked at the sector allocation with any seriousness. I bought "diversified" as a word rather than as a schedule of investments. It was 41% office by NAV at purchase and I did not know that until 2022.

Repurchase took three quarters. First quarter I was prorated to about 40% of my request because the plan hit its cap. Second quarter, prorated again. Third quarter cleared the rest. During those three quarters the NAV drifted down another 1.9%, so waiting in line cost me real money on the back half.

All in: 60k out, 18.9k in distributions, 53.1k returned on repurchase across three tranches. That's roughly 2.4% annualized before tax. Over a period when I could have owned a lot of things.

What I'd do differently. I'd read the schedule of investments before the marketing material, and I'd treat the sector mix as the whole decision rather than a detail. I'd size the position assuming the exit takes a year, because it did. And I'd have asked what the 8.5% load actually bought me, because with hindsight it bought me distribution, not diligence.

3 replies

2laurenkim53Passive

The 8.5% load is doing a lot of the damage here and I think you're being generous to yourself about the rest.

Run it without the load. 60k buys 60k of NAV at 25.00, that's 2,400 shares instead of 2,196. Same distribution rates, same terminal NAV. You'd have ended around 53.2k of principal back plus about 20.7k distributed, call it 3.6% annualized. Better, still not good.

So the load cost you roughly 120 basis points a year and office cost you the rest. Both mattered. Neither one alone explains a 2.4%.

1sonia_alvarez Get yoursPRO6

hollow's decomposition is right but I'd put the weight somewhere else again.

The distribution cut in 2020 is the part I'd chase. A REIT that has to cut from 6.2 to 3.1 was probably distributing above what the properties were producing before the cut. Verity, do you know what the coverage looked like in 2018 and 2019? If distributions were partly funded from offering proceeds or from borrowings rather than from operating cash flow, then the 5.5% you were collecting in the good years was in part your own capital coming back with a nice label on it, and the NAV decline you saw at the end was partly that.

That's checkable in the filings. It's the first thing I'd look at now on anything with a headline yield that clears the sector.

The three quarter exit doesn't surprise me at all. That's the vehicle working the way it's built. You don't get insulation from daily price swings and same-week liquidity out of the same structure.

3luis_carrera Get yours

I've been sitting on a decision about one of these for eleven months, which is its own kind of cost, so I read this one twice.

The line that got me is buying "diversified" as a word. I've done that with everything I've looked at, including things I did buy. The schedule of investments is a table in the filings and it takes twenty minutes.

Disagree slightly with tender though. Even with clean coverage, 41% office in 2018 was going to hurt by 2024 no matter how the distribution was funded. The funding question tells you about the sponsor. The sector mix tells you about the outcome.

Six years in a non-traded REIT for 2.4% a year after everything

3 replies