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Retail Properties of America’s Public Debut a Bust for Many Investors

Investors who bought a non-traded real investment trust (REIT) called Inland Western at $10 a share are less than pleased these days. That’s because the REIT went public earlier this month at $8 a share. Now called Retail Properties of America (RPAI), the split-adjusted value of the stock is worth less than $3 per share for investors who originally purchased it at $10. By any measure, that’s a huge loss.

By many accounts, it was expected that the pre-IPO target price would be in the $12 range. Even at $11, however, investors in the non-traded REIT were expected to be holding public stock valued at well below their original investment, according to an April 8 article by REIT Wrecks, a Website that tracks the REIT industry.

Most analysts estimated a split-adjusted value of between $4 and $4.80 per share if the company went public at $11.

Even after including the total dividend distributions of nearly $4 per share, accumulated over the full length of the investment period, investors were “only getting 80 cents back on every dollar they invested,” said Michael Stubben, president of MTS Research Advisors, in the REIT Wrecks story.

Problems with the Inland Western/Retail Properties REIT have been in the making for some time now, starting back in 2005 when the fund stopped taking in capital. When the market crashed in 2008, prices of the properties held in the REIT’s portfolio were extremely overvalued. As a result, dividend yields were cut from 6.4% to 1% by 2010.

Meanwhile, investors in the Inland REIT had little recourse. Unlike publicly traded REITs, non-traded REITs are not traded daily on a stock exchange. Non-traded REITs also have limited liquidity, unreliable market valuations, hefty upfront fees and commissions of up to 15%, dividend cuts and suspension of buyback programs. Moreover, an investor’s money in a non-traded REIT is tied up a long, long time, usually up to seven years.

Market valuation and lack of transparency are key sticking points for critics of non-traded REITs. As reported in the REIT Wrecks story, this issue is made all the more apparent in Inland Western’s September 2011 filing with the Securities and Exchange Commission.

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