The real estate boom and bust is hanging over many independent broker-dealers and their financial advisers as the market for non-traded REITs soured this year. According to an InvestmentNews article, investing largely in commercial real estate, many of the largest non-traded real estate investment trusts have had a tough year, slashing dividends to investors and shutting redemption programs. Some independent broker-dealers and their registered representatives have significant exposure to the non-traded REITs, which are illiquid, high-commission products.
An analysis of leading independent broker-dealers shows that non-traded REITs accounted for as much as 12% of a handful of firms’ revenue last year. Some independent broker-dealers didn’t sell the product, according to a listing in an industry publication, while non-traded REITs accounted for 2% to 6% of other firms’ gross revenue last year.
REITs are designed to pay investors a dividend, which in the past has averaged 6% to 7%. Stock sell-offs in the broader market don’t lower the value of shares during the life of the investment. That changed this year according to InvestmentNews, as some of the biggest and most prominent non-traded REITs cut dividends. Among the largest that have made the cuts are Behringer Harvard REIT I, Inland America Real Estate Trust, Inland Western Retail Real Estate Trust and Piedmont Office Realty Trust. Some of the REITs are even more illiquid than usual, worth perhaps 30% to 40% less than their price, and dividends have gone down the drain, many observers said.
Commonwealth Financial Network is one of the biggest sellers of non-traded REITs among independent broker-dealers. Revenue from non-traded REITs accounted for about 2% of its gross revenue of $519 million last year.
REITS that have too much debt also could struggle, industry observers said. Holding on until better days will be more difficult for highly leveraged REITS, especially those with debt maturing over the next two to three years.
Regulators have taken an interest in the product. In March, the Financial Industry Regulatory Authority reviewed broker-dealers’ sales and promotion of non-traded REITs, and asked firms for a variety of information, including descriptions of sales contests and cash and non-cash incentives. To date, FINRA hasn’t taken any enforcement action based on that information, according to a spokesman.