Thanks for your post and sorry for the time it took for me to respond. I actually reduced the one phoenix rating in the most recent dividend and fee comparison (which you can see here: viewtopic.php?f=2&t=8
). The reason is that CNL's combined upfront load (21%) is the highest of any non-traded REIT that I'm aware of, and they're not covering their dividend with cash flow or FFO. It also appears that their book value has declined to $6.41, vs. the $10 per share offering price (as of year end 2010).
If CNL's fees are among the highest in the non-traded REIT universe, then CNL should also be generating exceptionally high risk-adjusted returns, and this is clearly not the case. Let me be more clear - extraordinary fees would be acceptable if investment performance is also extraordinary, but in this instance it isn't true.
In CNL's case, the decline in book value is directly related to paying out dividends in excess of earnings, and skimming 21% off the top of every $10 invested. It's impossible to overcome those fees in the absence of extraordinary investment performance, so something has to give. In this case (and in the case of many other non-traded REITs), the first thing to go is shareholder principal. This decline in value has been steady, and it has been recognized in secondary market trading activity. CNL itself reported the following in its year end 2010 10K:
CNL Lifestyle Properties Inc. wrote:As of December 31, 2010, the price per share of our common stock was $10.00. We determined the price per share based upon the price we believed investors would pay for the shares and upon the price at which our shares are currently selling. We did not take into account the value of the underlying assets in determining the price per share (emphasis mine). We are aware of sales of our common stock made between investors totaling 50,082 shares sold at an average price of $6.63 per share during 2010, 8,640 shares sold at an average price of $8.97 per share during 2009 and 21,793 shares sold at an average price of $9.21 per share during 2008.
This steady decline in secondary market trading value results from the fact that CNL has not covered its dividend since 2009
. This means that they are gambling with investor principal in order to maintain the current level of income. CNL's 6.25% dividend may be quite soothing for income-starved investors, and your FA's may look brilliant for putting their clients into CNL's non-traded REIT vehicle for the time being, but they may be accepting a significant loss of client principal in exchange. There is no free lunch.
Based on my current estimation of book value, investor principal has been eroded by almost 40%. This is because CNL funds the deficit with borrowed money, and this debt must be paid back, along with the 21% load. CNL itself has acknowledged the value of these secondary market trades above, and these arm-length trades on the secondary market clearly reflect an erosion in the value of the shares.
There is obviously huge demand for these products - and in a different form they could make a lot of sense for smaller investors. However, in their current structure, they really don't make a lot of sense for the average investor, and most would do much better just buying publicly traded REITs, which are cheaper to buy and much more liquid. You should, for example, take a look at Realty Income (NYSE: "O"). That REIT pays about 5% (based on the current stock price), the dividend has consistently been raised every quarter, and it is being paid out of earnings, not
capital or borrowings. They look a lot like Cole - they own a diversified portfolio of triple net lease properties - except that you can buy 1,000 shares of O for $24.95, and O pays real dividends using real earnings.
Non-Traded REITs use their fake dividends to sell their shares, (if you haven't already seen these posts, check out: TNP Strategic Retail Trust Uses Dividend as Sales Tactic
and this post: Lightstone REIT Implodes; Let's Go to the Audiotape!
). These fees create HUGE conflicts of interest. All things being equal, how do higher fees benefit the investors? It's a zero sum game. Every penny paid to fees must be made up.
As far as CNL's track record goes, one of their largest deals was CNL Hotels & Resort's sale of a luxury hotel portfolio to Morgan Stanley in 2007 at the top of the market. The Morgan Stanley unit that bought the CNL portfolio is now in bankruptcy, $1.5 billion of debt went into default, the properties are in foreclosure, and that particular portfolio is worth half of what Morgan Stanley paid for it. Even at the price that CNL got on the sale (the balance of the portfolio was sold to another REIT), investors saw only a small premium to their original cost basis, and that was only after they successfully sued CNL to reduce its management internalization fee from $150 million to $80 million. Even at $80 million, it was excessive, and investors had to fight to win the "reduction". Had CNL not siphoned off all those fees, investors in CNL Hotels & Resorts would have done much, much better, but even then their returns would have been mediocre. Now that the market has come back to earth, and 2007 is unlikely to ever happen again in our lifetimes, how will CNL overcome that 21% load if the Lifestyle Properties portfolio can't even cover the dividend?
I would love to see these products evolve into better deals for investors, and there are some signs that this may be happening, but I am not holding my breath!