ING Raises The Bar on Non-Traded REITs

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ING Raises The Bar on Non-Traded REITs

Postby REIT Wrecks » Sun Feb 14, 2010 4:17 pm

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.


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Re: ING Raises The Bar on Non-Traded REITs

Postby Silverdollar » Tue Feb 16, 2010 2:11 pm

REITWrecks wrote: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


Do you know when Northend Income Property Trust will be offered to the public? I called my broker at BofA and he didn't know. Also, what do you think is the better deal, Clarion Property Trust or Northend?

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Re: ING Raises The Bar on Non-Traded REITs

Postby REIT Wrecks » Tue Feb 16, 2010 11:22 pm

Silverdollar,

Welcome! And thanks for registering - I know it's a bit of a pain, but it keeps the robospammers at bay. As for your question, Merrill Lynch filed a preliminary prospectus for Northend Income Property Trust on May 13, 2009, (click here to view it) but as far as I know it has not yet gone effective. Clarion Income Property Trust is probably not anywhere close to filing a prospectus, and without at least a preliminary prospectus it's difficult to say which one is better. However, all things being equal, higher fees cannot help but hurt your returns. For that reason, and a few others, it looks like the Northend offering, as it's currently proposed, is slightly better than Clarion Income Trust. If you intend to hold your shares for a long, long time though, Clarion may be the better choice. I HATE to hedge like this, but it's that close and it really depends on your objectives.

As for the details, Northend's selling commission is 50bps lower than Clarion's, which is the primary short term advantage. Over the long term, Northend has a slightly higher management fee than Clarion (15bps higher, or 1.25% vs. 1.1% respectively). Consequently, if you hold your shares for more than 3.33 years, you'll be largely indifferent. If you plan to hold them longer than that, Clarion is the way to go, particularly if you're looking for a little capital appreciation. Here's why:

Both have an incentive/profit sharing scheme that kicks in after investors have received a "priority" annual return. Clarion is offering a 6% priority return, while Northend is offering a 7% priority return. However, Merrill Lynch takes 50% of anything over the priority return, while Clarion only takes 25%. Both profit sharing mechanisms are capped at 10% of total profits. Calculating hypothetical results would be subject to so many variables in terms of market returns and hold times that it would be futile to model all the possible scenarios, but if it were me, and I were holding for the long term (further assuming that neither one of these things is likely to knock the lights out in terms of capital appreciation, and thus hit the cap), I'd rather have 75% of the profits as opposed to 50%. Income-oriented investors may feel better with Northend's higher 7% priority return and be grateful, but that's not me.

One thing to keep in mind, particularly if you're counting on the income and/or your principal at some later date: neither of these things will be particularly liquid. Clarion will allow redemptions of up to 5% of Net Asset Value per quarter, while Merrill Lynch has set no limit on Northend's redemptions. However, either of these two redemption programs can be shut down at any time for any reason, in which case you're stuck. Along those lines, Merrill plans to fund it's unlimited redemption policy in a number of different ways, including using proceeds from new shareholders to pay out departing ones and as well as borrowings. This means, as usual, that you'll need to be alert for red flags like declining earnings, dividend coverage and any fluctuations in cash flows from operations.

I will look forward to reading the final offering documents for both deals when they're available. These two are far from perfect, but improving on the current crop is a pretty low hurdle!

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Re: ING Raises The Bar on Non-Traded REITs

Postby Silverdollar » Thu Feb 18, 2010 1:28 pm

Indeed. Thanks for the detailed response. I am looking for income, and I don't mind the share price moving up and down as long as I know the dividends are real, so I think I may wait for Clarion. Hopefully my broker at BofA will be able to sell it. In the meantime, I don't see many great alternatives to bond ladders and money markets!

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Re: ING Raises The Bar on Non-Traded REITs

Postby crabsofsteel » Sat Mar 06, 2010 7:35 am

whoa there! folks, get thee right over to www.cmbs.com -> Securitizations and look for all deals with ING Clarion as special servicer. Looks like they are special servicer in about $20B worth of deals. What does this mean? It means they own the bottom (first-loss and non-investment grade bonds) of the deal. We know that CRE prices are down about 40% so it is only a matter of time before they take a hit. Could it be that this capital raise is being done in advance of these losses?

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