ING Clarion Partners, a real estate management subsidiary of ING, the Dutch-based financial services conglomerate, has just announced plans to raise over $2 billion for a new Non-Traded REIT. With the introduction of this new REIT, which will be known as Clarion Capital Trust Inc., ING's real estate investment management business will draw closer to the Everest of investment management: reaching $100 billion of assets under management ("AUM"). Clarion will be offering one of the most attractive investment structures in the Non-Traded REIT universe, and it is undoubtedly the parent's focus on AUM that enables ING Clarion to raise the Non-Traded REIT bar.
We won't know exactly how high until their registration becomes effective and the final prospectus is filed with the SEC, but they are offering several improvements. Like NorthEnd Income Properties Trust, another new entrant sponsored by Bank America - Merrill Lynch, Clarion Income Property Trust's fees will be much smaller relative to other Non-Traded REITs, and it will have a share redemption program that is more investor friendly as well. ING's focus on growing AUM is much different than many other Non-Traded REIT sponsors, and it allows ING to depart from the usual short-term, transaction-based focus on generating fees and sales commissions.
While significant in its own right, the fee structure is small potatoes compared to ING's intention to reprice the shares daily based on the net asset value of its portfolio (Bank America - Merrill Lynch is proposing a similar valuation/pricing scheme for Northend). Although the valuation mechanism to be used by ING remains to be seen, any valuation transparency at all will be a huge improvement in this incredibly opaque corner of the market.
As I wrote in a much earlier blog post how could a brand new Non-Traded REIT with no assets
and unproven management be worth the same $10 a share as a 5 year old REIT with $3 billion in diverse assets spread across the country, and the same as a 10 year old REIT with just $200 million in assets concentrated in one small market? It is simply impossible to believe, yet most sponsors and broker dealers will go to almost any length to keep selling this $10 opium to investors. Finally, this arbitrary $10 facade appears to be cracking.
In addition to improved valuation transparency, Clarion Property Trust will offer a relatively generous share-redemption program. Under the proposed redemption structure, investors will have the ability to redeem shares worth up to 5 percent of the fund's net asset value every quarter. The redemption price generally would be equal to the REIT's then current share price. Since most Non-Traded REITs limit redemptions to 3 to 5 percent of shares outstanding, or worse, to proceeds available from reinvested dividends, this is a big improvement in liquidity. As investors in Cole Capital, Behringer Harvard, KBS and Piedmont (among others) have discovered, many of these share redemption programs can be eliminated literally overnight without warning.
ING intends to set the initial share price at $10.31, and then revalue the shares daily as it acquires assets. If ING is successful in raising the intended $2.25 billion it wants, it will file with regulators to raise even more cash. Due to the proposed share redemption program, ING is not attempting to schlep some dubious and amorphous "liquidity event" to investors
. In theory, investors can sell whenever they want, assuming not everybody decides to rush for the exits at the same time.
Ironically, one of Clarion's other very attractive features - low fees - may actually limit ING's success. Along with very low or non-existent transaction fees (e.g., acquisition fees, management fees, disposition fees) Clarion Property Trust will only pay a 3 percent commission to brokers. This means that almost 97% of investor cash will go toward the purchase of real estate, as opposed to the usual 80-85%. Ironically, this investor-friendly commission structure provides brokers with much less incentive to peddle this deal over the others that still pay them their usual 7 percent vig. If Wall Street is driven by fear and greed, then Non-Traded REIT sales are driven almost entirely by greed, and for that reason alone it will be interesting to see how the ING offering plays out.