Non-Traded REITS

Can Investors Recover for Losses from NYC REIT?

January 26, 2021 | By Christopher Keogh

Yes, many investors have filed claims to recover losses sustained as a result of their investments in NYC REIT, a real estate investment trust that purports to own “a portfolio of high-quality” commercial real estate located within the five boroughs of New York City. This REIT began as a non-traded REIT, meaning it was not traded on an open exchange, making it is highly illiquid. Not only was it difficult for investors to get out of their positions, share prices have dropped substantially since its initial private stock offering. Investors were led to believe returns on the investment would exceed 10% on an annualized basis, but in reality, NYC REIT turned out atrocious for investors. The securities lawyers at Rich, Intelisano & Katz (RIK) have been highly successful in recovering losses for investors who had positions in non-traded REIT investments.

NYC REIT is not a high-quality investment with annual returns exceeding 10%. On the contrary, this REIT, like all REITs, is high risk and only suitable for a limited pool of investors – savvy investors who are wealthy and sophisticated with a long-term investment horizon. First, NYC REIT is a non-traded REIT, which means it is significantly less liquid than REITs that trade on an open exchange. As such, when investors want to sell their position, they are forced to sell their shares at a heavily discounted price. Thus, non-traded REITs are rarely a suitable investment for most investors. Second, NYC REIT owns only 8 mixed-use office and retail condominium buildings (which is miniscule compared to other REITS). The limited portfolio creates an inherent high risk, such as limited diversification, less exposure to potential tenants, and the lack of ability to spread costs over a larger portfolio. Unfortunately, NYC REIT severely underperformed and the risk associated with it became realized for many investors.

The NYC REIT was disastrous from the beginning. The initial private stock offering price of the REIT was $25 per share. By 2018, the price per share plummeted over 50%. The board then decided to suspend future distributions – hurting investor cash flow. Then, the board authorized a reverse stock split, an action that consolidates the number of existing shares of stock into fewer, proportionally more valuable shares (generally, a move to boost the company’s image if the stock price has dropped dramatically). Then, when the REIT went public in August 2020, it was a complete failure. NYC REIT, now trading on the New York Stock Exchange (“NYSE”) under the symbol “NYC,” dropped in value approximately 40% on the first day. This abrupt decrease in share price left investors with significant losses.

Mortgage REITs Collapse During Market Turmoil

April 1, 2020 | By Ross B. Intelisano

Mortgage REITs have often been recommended by brokerage firms as safe investments that generate consistent income. However, during the recent market turmoil the bottom has fallen out for many Mortgage REITs. For example, AGNC Investment and Annaly Capital are down over 50% in the last month or so, a way larger drop than the general equities markets. Another Mortgage REIT, AG Mortgage, is down 75%. Many of these mortgage REITs do not expect to be able to meet upcoming margin calls.

How did these mortgage REITs end up here? Well, first of all, a REIT is a real estate investment trust which is a security that invests in real estate directly either through properties or in this case, mortgages or mortgage-related bonds. The mortgage REITs listed above are publicly held and sold on exchanges. There are also what are called non-traded REITs which are often sold through broker-dealers and are not traded publicly. Mortgage REITs invest and own property mortgages. They also loan money for mortgages to real estate owners, buy existing mortgages and purchase complicated MBS (mortgage-backed securities). Mortgage REITs generate revenue by collecting interest on the mortgage-related products.

As reported widely this week, the Mortgage REITs often fund themselves by pledging bonds in return for cash in the repo markets. They are highly leveraged which in good times allowed them to pay dividends at higher yields than most bonds. Brokers often recommend to investors to reach for yield in low yielding time periods and many brokers sold Mortgage REITs to investors without fully disclosing the risks associated with them. In recent weeks, many Mortgage REITs found that the mortgage bonds they held dropped in value which triggered margin calls which then forced the Mortgage REITs to sell bonds into a falling market.

FINRA Fines LPL for Failure to Supervise on Complex Products

May 8, 2015 | By Ross B. Intelisano

What are non-traditional exchange-traded funds (ETFs) and non-traded real estate investment trusts (REITs)? Why are independent broker dealers selling these complex products without proper supervision? FINRA wants to know and just slammed LPL Financial for doing such a thing.

This week, FINRA censured and fined LPL $10 million for broad supervisory failures in the sale of complex products such as leveraged ETFs and non-traded REITS. It also ordered LPL to pay an additional $1.7 million in restitution to certain customers who bought non-traditional ETFs.

This is a watershed moment for these and other complex products. First, LPL has over 14,000 brokers nationwide and is by a wide margin the largest independent broker dealer in the U.S. (Lincoln Financial Network with over 8,000 brokers is second). The biggest independent broker-dealer getting hit like this by FINRA is the equivalent of FINRA fining the old Merrill Lynch in wire house terms.