Have you suffered investment losses in a Hospitality (Non-traded) REIT?
The White Law Group continues to investigate FINRA arbitration claims involving brokerage firms who may have unsuitably recommended non-traded REITs to investors. Specifically, the firm is investigating claims involving Hospitality REITs. If you have suffered financial losses due to your financial professional recommending the purchase of a Hospitality REIT, the White Law Group may be able to help you.
Unfortunately for investors it appears that many financial advisors/brokerage firms that sold Hospitality non-traded REITs, may have understated or misrepresented the risks and liquidity problems.
Non-traded REITs are Complex, High-risk Investments
Investors often seek products offering more attractive yields during extended periods of low interest rates such as publicly registered non-traded real estate investment trust (REIT) also known as “non-traded REIT.”
A real estate investment trust, or REIT, is a corporation, trust or association that owns and often manages income-producing real estate. REITs pool the capital of numerous investors to purchase a portfolio of properties such as hotels, shopping centers or apartments.
The following are some of the risks associated with investing in non-traded REITS:
Distributions are not guaranteed. It is up to the individual REIT’s Board of Directors to decide whether to pay distributions and the amount of any distribution. The distributions may exceed operating cash flow. Distributions for all REITS are from current or accumulated earnings and profits are taxed as ordinary income, as opposed to the tax rate on qualified dividends, which generally carries a tax rate of 15 percent. But that rate can be 20 percent for people in the highest tax bracket or 0 percent for those in the lowest two tax brackets. If a portion of your distribution constitutes a return of capital, that portion is not taxed until your investment is sold or liquidated, at which time you will be taxed at capital gains rates.
If a REIT sponsor is behind or incomplete in its SEC filings this can be a red flag.
Non-traded REITs typically come with high fees and sales commissions. Front-end fees generally come in two parts: Selling compensation and expenses, which cannot exceed 10 percent of the investment amount; and additional offering and organizational costs, sometimes referred to as “issuer costs,” which are also paid from the offering proceeds.
This can make it challenging to make a profit. If for example there is a 15 percent front-end fee on a $10,000 investment that means that only $8,500 is actually working for you.
Non-traded REITs are illiquid. As their name implies, non-traded REITs have no public trading market. most non-traded REITS are structured as a “finite life investment,” meaning that at the end of a given timeframe, the REIT is required either to list on a national securities exchange or liquidate.
Unfortunately, even if a liquidity event takes place, there is no guarantee that the value of your investment will have gone up—and it may go down or lose all its value. If the value of the REIT’s portfolio has changed materially during the offering period, then new investors may be paying a per-share price above or below the per-share net value of the underlying real estate.
Early redemption is often difficult and may be expensive. Most public non-traded REIT offerings place limits on the number of shares that can be redeemed prior to liquidation. When investing in non-traded REITs investors must consider their short-term needs for capital before investing in a long-term, illiquid security and should carefully review the section explaining the terms and limitations of the REIT’s share redemption plan (SRP).
Due to the illiquid nature of the investment, investors may receive solicitations to sell their non-traded REIT investment outside of the sponsor’s redemption program through a mini-tender offer. These offers are often for less than 5 percent of a company’s stock, and they typically carry far fewer protections to investors than traditional tender offers. Investors can wind up receiving a price well below the sponsor’s estimated per-share value or, if available, the early-redemption program price.
Hospitality Non-traded REITs take a Dive in 2020
The COVID-19 global pandemic impacted the hospitality sector with “devastating results” in the first quarter of 2020, dropping occupancies to the lowest points ever by the third quarter of 2020, according to an article in Blue Vault.
Three nontraded REITs, Hospitality Investors Trust, Procaccianti Hotel REIT and Watermark Lodging Trust, with assets exclusively concentrated in hotel properties, took a huge hit from governmental lockdowns. Hospitality Investors Trust, Inc. filed for bankruptcy in May 2021 and stopped filing quarterly reports with occupancy rates, according to Blue Vault.
Hospitality Investors Trust reached its lowest occupancy rate in Q2 2020 at 26%, according to the article. Watermark Lodging Trust reached its lowest occupancy level in Q3 2020, just as the other two REITs were recovering.
While Procaccianti Hotel REIT is back up to 79%, close to its rate in Q3 2019 at 82.5%, Watermark Investors Trust has not reached its pre-pandemic occupancy levels, at 60.4% compared to its pre-pandemic rate of 77.8%.
Watermark Lodging Trust – Disappointing Net Asset Value
Watermark Lodging Trust was created in October 2019 when Carey Watermark Investors 1 and Carey Watermark Investors 2, two publicly registered non-traded REITs sponsored by W.P. Carey Inc. (NYSE: WPC), merged.
Unfortunately for investors, after the merger, the REIT declared its first post-merger net asset value (NAV) of $5.51 per Class A share and $5.45 per Class T share. Original shares were sold for $10 each indicating nearly a 50% loss.
The company was forced to close hotels last March during the Covid-19 pandemic and were generating no revenues while lockdown orders were in effect, according to SEC filings. The company noted that it had $277 million in debts scheduled to mature in 2020, the debts were nonrecourse and some feature extension options.
On June 30, 2020, the Board of Directors determined that the current suspension of the Company’s redemption program will remain in effect until the board determines to lift the suspension. As of December 2020, all redemptions were suspended.
Procaccianti Hotel REIT Modifies Loans, Suspends SRP, and Stock Offering
Procaccianti Hotel REIT’s $550 million initial public offering launched in August 2018 to invest in hospitality properties including select-service, extended-stay, and compact full-service hotel properties throughout the United States.
According to filings with the SEC, on April 23, 2020, Procaccianti reached an agreement with certain lenders to modify two loans. These include the Hotel Indigo Traverse City Loan and the Hilton Garden Inn Loan.
Procaccianti previously announced a temporary suspension of its common stock offering effective April 7, 2020 as well as the temporary suspension of its distribution reinvestment plan effective April 17, 2020. The company previously noted that it intends to pay quarterly distributions for the quarter ending March 31, 2020. Future distributions will reportedly be made on a quarter-by-quarter basis.
Hospitality Investors Trust Files for Chapter 11
On May 19, 2021, Hospitality Investors Trust Inc., (formerly American Realty Capital Hospitality Trust) a non-traded REIT that owns a portfolio of hotel properties, filed for Chapter 11 bankruptcy in Delaware to restructure its $1.3 billion unsecured debt.
According to SEC filings, each share of Hospitality Investors Trust common stock outstanding will be cancelled and exchanged for a right to receive contingent cash payments (CVR). Shareholders of the common stock will receive one CVR in exchange for each share of common stock. The maximum number of payments made per CVR will not exceed $6.00 and will not be transferable, except in limited instances such as the death of the holder.
For more information on the firm’s investigation of Hospitality REITS, please see the following:
Is a Hospitality non-traded REIT Suitable for you?
Prior to making recommendations to an individual investor, brokerage firms are required by the Financial Industry Regulatory Authority (FINRA) to disclose all the risks of an investment. Recommendations should only be made if the investment is suitable for an individual investor given their age, investment objections, investment experience and risk tolerance.
Brokerage firms that do not perform adequate due diligence on an investment and/or make unsuitable recommendations can be held accountable for investment losses through FINRA arbitration.
High commissions could be a motivating factor for unscrupulous financial advisors to sell the REIT regardless of whether the investment is in line with the client’s investment objectives and profile. Moreover, the total commissions and expenses make it difficult for non-traded REITs to perform in line with the market.
Free Consultation with a Securities Attorney
If you invested in a Hospitality REIT and would like to discuss your litigation options, please call the securities attorneys of The White Law Group at 888-637-5510 for a free consultation.
The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Seattle, Washington.
For more information on The White Law Group, visit https://www.whitesecuritieslaw.com.