Forbes Magazine Slams Private REITs (Wells & W.P. Carey)

Forbes Magazine Slams Private REITs:
Leo F. Wells has become one of the hottest names in real estate. His real estate investment trust is amassing an amazing amount of fresh capital: In 2003's first half he sold $1 billion of stock, amounting to nearly half what public REITs raised, and he's targeting another $1.5 billion by year's end. Like a latter-day Harry Helmsley, he is using the money for a buying binge of first-class office properties.

As the largest private real estate trust, $3.3 billion (assets) Wells REIT does things on a grand scale. The company owns 18 million square feet of prime office buildings that are 98% occupied, mostly by corporations with investment-grade credit ratings. Wells REIT pays an annualized 7% dividend yield, in line with those of public office REITs.

Although Wells files publicly with the Securities & Exchange Commission, you must buy and redeem the stock directly from the REIT. This private-REIT bunch is madly peddling shares. W.P. Carey, the grandfather of these creatures, right now is offering $1.8 billion in stock.

If you want to redeem your Wells shares, you may have to stand in line. The REIT has committed to cash out (at the full $10) up to 3% of its shares every year. So far redemption orders have been modest and last year's $21 million of cash-outs came to only 1.75% of the stock then outstanding. But if there were a rush for the exits--say, after a big cut in the dividend--the redemptions would be first come, first served, and it might take a long, long time to unwind a position.

Are these good investments? Not according to Stephane Fitch the author of the Forbes article. Private REITs keep their share prices frozen, meaning there's no possibility of appreciation. And there is scant prospect of a hostile tender offer to rescue the shareholders of a mismanaged private REIT.

The REIT buys that service from a company owned by Leo Wells, called Wells Management, to which it pays a fee of 4.5% of the rent roll. Real estate pros find that way high: For a triple net lease, 1.5% is more like it.

Then there's an entity called Wells Real Estate Funds, which gets a 2.5% cut on the purchase price for advice on which properties to buy.

Then come lush fees on all the new capital. Some $400 million--16% of the equity capital Wells is raising this year. By Green Street Advisors' reckoning, that's four times what publicly traded REITs incur when they make follow-on offerings. A third of the boodle goes to Wells' own sales organization, Wells Investment Securities, or its advisory firm, Wells Real Estate Funds.

This one could get ugly! Sphere: Related Content