The online version of Financial Advisor magazine, www.fa-mag.com, had an article yesterday about an Investor Alert issued by FINRA concerning non-traded REITs. The Alert concerns those particular risks that an investor faces with non-traded REITs that he wouldn't necessarily experience investing in traded REITs. FINRA mentions the obvious lack of liquidity and high fees. These are issues that have been scrutinized in the due diligence process for some time now.
It also mentions the issue of dividend coverage and valuation; again two issues of close attention in the due diligence process. The regulator gives a quick formula for determining whether dividends are being covered, then directs investors to the SEC website for source material. While I would argue the choice of sources and the equation,. if an investor can find his way around an annual report well enough to find the numbers, he will be well served by doing the calculation. On the other hand, the caution concerning valuations is rather vague and provides no suggestions on how an investor can protect himself.
Arguably, the offering materials of a REIT that is in the capital formation stage should address all of these issues. Unfortunately, the materials have become weighted down with so much disclosure that finding the discussion of these issues is difficult at best.
This is where the sophisticated advisor distinguishes himself. By being familiar with the term of the offering and the details relating to these hot button issues, the high value advisor can assist the client in evaluating the offering in light of the issues and can put the importance of the items in the proper perspective.
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