In an event that now seems to be the norm in the realm of non-traded REITs, Wells REIT II announced a decline in its estimated value per share from $10 to $7.47 — a drop of more than 25 percent in value. This sharp decline in share value of this non-traded REIT occurred despite its properties having a 94.3 percent occupancy rate, and according to Wells, “some of the most prestigious office addresses and tenant corporations in the U.S.”
Although this price decline is not accompanied by a decline in distributions, we believe investors should take a hard look at the basis for these distributions. In a letter dated November 10, 2011, the Chairman of Wells REIT II, Leo F. Wells, notified investors that despite the decline in value per share, quarterly distributions will not be affected.
However, we believe that Wells failed to fully address the reasons why shares are worth 25 percent less than their initial value. Instead, Wells directed investors to watch this video at the Wells website.
In the video, Wells addresses two topics: quarterly distributions and new estimated value per share. Before addressing share re-pricing, Wells emphasizes to investors that their quarterly distributions for Wells REIT II have not changed. The value of quarterly distributions is among the strongest selling points for non-traded and private REITs. But we believe investors in non-traded REITs need to ask: Where are these distributions coming from?
Wells has indeed paid investors quarterly distributions of about 5 percent, which represents a reduction from 6 percent effective February 2011. However, according to the Wells REIT II 2010 annual report filed with the Securities and Exchange Commission, Wells distributed to investors approximately $313.8 million, a figure which includes investors who decided to redeem their shares. This came at a time when Wells II was reporting a net income of a little more than $23 million. Even accounting for the REIT’s total cash from operating activities ($270.1 million), the distribution amount exceeded funds from operations by almost $44 million.
In reality, Wells REIT II has continuously combined a return of the investors’ initial investment with REIT borrowings in order to cover its distributions. Consequently, 3.3 percent — more than half of the 6 percent distribution — was treated by the REIT in 2010 as a return of capital. In other words, the distributions investors received throughout the end of 2010 were partially covered by investors’ own investment and by loans and borrowings made to the REIT.
In its third quarter report for 2011, Wells REIT II reported that since its inception in 2004 and as of September 30, 2011, the non-traded REIT has paid more than $1.1 billion dollars in cumulative distributions in excess of earnings.
In addition to the foregoing, we have concerns regarding the liquidity risks of Wells REIT II. If investors elect to redeem their shares, they will find out that Wells has modified its redemption policy. Although Wells REIT II still technically offers a share redemption program, it is limited to DRP proceeds (dividend re-investment plan) or 5 percent of the total shares outstanding. Moreover, with respect to the amount paid upon redemption, the REIT made the following disclosures in its 2011 third quarter report:
Effective November 8, 2011, the price paid for shares redeemed under the SRP [share redemption program] in cases of death, disability, or qualification for federal assistance for confinement to a long-term care facility (i.e. a nursing home), will change from 100 percent of the price at which we issued the share (typically, $10.00) to 100 percent of the estimated per-share value ($7.47); and the price paid for all other redemptions (“Ordinary Redemptions”) will change from 60 percent of the price at which we issued the share (typically, $6.00) to $5.50.
This means that, if investors decide to redeem their shares through the Wells REIT II share redemption program without extraordinary circumstances such as death or disability, and if they are lucky enough to make their request when the limitations have not been reached yet, investors could lose up to 45 percent of their money.
Vernon Healy continues to urge investors to do considerable research before investing in non-traded REITs. In October, the Financial Industry Regulatory Association, also known as FINRA, issued an investor alert cautioning investors on the dangers of non-traded REITs, including liquidity risks, valuation methods, and excessive fees.
Many clients come to Vernon Healy because they were misled by a company or professionals focused on their own best interests. They overpromised and under delivered on the product or service they pitched. We believe our job is to assist clients in analyzing the likely net benefit of pursuing litigation and arbitration as well as aggressively pursuing the client’s claims.
For more information, contact Vernon Healy at 239-649-5390 to discuss your possible options regarding a non-traded REIT claim.
