Inland Western REIT

On the heels of an economic recession, non-traded REITs like Inland Western Retail Real Estate Trust have unleashed a firestorm of financial challenges for investors, with many of the biggest REIT players slashing dividends or drastically limiting their redemption programs.

For many investors, these actions were unexpected. Many purchased their REITs on the recommendation of a broker/dealer, which touted the products as conservative, low-risk investments. Instead, non-traded REITs are complicated financial products, which lack transparency and often come with a number of less-than-desirable features. Not only do non-traded REITs lack transparency, but they also are pricey to get into, sometimes costing investors upwards of 15% in broker commissions and upfront fees.

Unlike their publicly traded counterparts, non-traded REITs, also known as unlisted REITs, are illiquid. Redemptions in non-traded REITs can be suspended at any time. In most instances, there is a “waiting period” of seven years or more before shareholders are able to redeem their shares. Dividends can also be reduced or suspended at will.

In recent months, more investors have filed formal arbitration complaints against various broker/dealers for allegedly misrepresenting sales of non-traded REITs. In their complaints, investors allege that they were misinformed about the investments and that certain key risks were never properly disclosed.

In the case of Inland Western, the company has slashed its dividend by 90%, as well as suspended its share repurchase program indefinitely. Inland Western also faces share valuation issues. In a Jan. 27, 2010 letter to shareholders, Inland Western stated that its shares were worth $6.85 per share. However, as reported in a Feb. 19, 2010 story by REIT Wrecks, a Web site that provides in-depth analysis on the REIT industry, there's a question mark looming over the accuracy of that price.

Using Inland Western's own reported financial results, prospective earnings ability and funds from operations (FFO), REIT Wrecks applies a market-based FFO multiple to come up with a share value price of $1.80 to $3.60 per share, at most. Either way, it is far less than the $6.85 figure that Inland touted in its January shareholder letter.

This spring, the Financial Industry Regulatory Authority (FINRA) stepped up its scrutiny of non-traded REITs by formally examining the marketing practices of broker/dealers selling non-traded REITs. FINRA first launched probes into non-traded REITs in March 2009, issuing letters for information from 10 to 20 of the most active broker/dealers in the market, according to a June 1 story by Bloomberg.

As reported in the Bloomberg story, non-traded REITs tend to attract unsophisticated investors who may not thoroughly understand the extent of the risks that the products present. Those risks include lack of share trading; fees that can dramatically reduce returns; share devaluations; dividend cuts; and the suspension of buyback programs.

Maddox Hargett & Caruso is currently investigating sales of non-traded REITs, including Inland Western, Inland American and Behringer Harvard REIT I. If you believe your broker/dealer or financial adviser misrepresented the facts concerning investments in a non-traded REIT, please contact us.


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