Many people think it is, including the Financial Industry Regulatory Authority ("FINRA"). FINRA is an independent regulatory organization empowered by the federal government to "ensure that America's 90 million investors are protected". Of course, that very mission begs the question protected from whom?, but for better or worse FINRA's chief role is to protect investors by maintaining fairness in the US capital markets. FINRAs role is broad and important, and among other duties, FINRA regulates many aspects of non-traded REITs like Cole REIT II.
Almost 12 months ago, FINRA issued Notice 09-09, which incorporates non-traded REITs specifically, and it states that:
In short, this is a problem if you're like most of us and you actually want your money back someday. In fact, not only is Cole REIT paying dividend distributions in excess of cash flow, but its cash flow difficulties seem to be getting worse. Cole REIT II's earnings have been declining, and on on November 10, 2009, Cole's board of directors suspended the Company's share redemption program indefinitely. Basically, this means that Cole REIT II no longer has the cash to honor its share buyback program.paying dividend distributions that are unsustainable over the long term due to cash flow difficulties presents a significant risk to investors' future returns and the long-term viability of the program
Cole REIT II has not always paid dividends in excess of cash flow, and it's certainly possible that they'll be able to fund distributions from operating cash flow in the future. However, this may be unlikely given Cole's past practice. Over the past three years, Cole reports that over 50% of the dividends were paid simply by returning shareholders' own money.
Sadly, the practice of inflating dividends is a common tactic in the non-traded REIT world (see [url=http://www.reitwrecks.com/forum/viewtopic.php?f=2&t=5]REISA Addresses Non-Traded REIT Ponzi Scheme Allegations[/url]), and it's done mainly to help sell more shares. While paying inflated dividends may be an incredibly effective marketing gimmick, it's also incredibly harmful to shareholders. [url=http://www.reitwrecks.com/forum/viewtopic.php?f=2&t=31]To the extent that shareholder funds are not invested in income producing property, overall shareholder returns are irrepairably harmed[/url]. Indeed, Cole itself says this tactic may "substantially reduce" current returns and capital appreciation. In its 10K, Wells REIT II, a competitor of Cole's, describes the problem this way:
Non-traded REIT financial statements are complex and difficult to understand, but it's not difficult to understand that dividends must come from cash flow. To the extent that they do not, on a long term basis, it's a big problem and management is putting shareholder returns in great jeopardy. Whether Cole REIT shareholders ever enjoy positive overall returns remains to be seen, but frankly, management owns almost no shares and nobody is paid to worry about overall returns.we may fund our distributions from borrowings or even the net proceeds from our ongoing public offering. If we fund distributions from financings or the net proceeds from our public offering, we will have less funds available for the acquisition of properties, and the overall return to our investors may be reduced
Since inception, Cole REIT II has paid management $65.9 million in acquisition fees, $18.8 million in financing fees, $16.3 million in organization and offering costs, and $17 million in asset management fees, on top of $135.5 million in commissions and fees paid to stock brokers and financial advisors. That's a $252 million bonanza just for paying shareholders back with their own money. When the music stops, one wonders, how could there be anything left for investors?
[url=http://www.reitwrecks.com/forum/viewtopic.php?f=2&t=21]Cole REIT III "Wholly Inappropriate" Says Advisor[/url]
[url=http://www.reitwrecks.com/forum/viewtopic.php?f=8&t=116]Can't Trust Cole Credit Property Trust III[/url]
[url=http://www.reitwrecks.com/forum/viewtopic.php?f=2&t=23]Cole REIT Redemption Flip Flop: Are Some Investors Special?[/url]
[url=http://reitwrecks.com/2009/05/non-traded-reits-are-designed-to-be.html]Non Traded REITs Are Designed to be Sold, Not Bought[/url]