From the September 2009 issue of Investment Advisor • Subscribe!

September 1, 2009

Retirement Planning: Time for Non-Traded REITs?

Retail commercial real estate could be a good investment for retirees

Finding an asset class in the midst of a recession that will provide retiree and pre-retiree clients with exactly what they need--a steady stream of income, great yields, and a stable net asset value--may seem out of reach, but the non-traded REIT market could be just the ticket.

In fact, Cole Real Estate Investments began offering in January its Cole Credit Property Trust III, Inc., which is a non-traded REIT focusing on big box, necessity retail commercial real estate--that includes retailers like Walmart, Target, BJ's, Walgreens, Home Depot, and Lowe's, to name a few. While commercial real estate has been hit by the recession like other asset classes, "there are many sectors of the commercial real estate market that have held up really well, especially the necessity retail" space, says Clint Blaser, a partner with National Planning Corp. in Scottsdale, Arizona, who is allocating about 20% of his clients' portfolios to the Cole Credit Property Trust III.

Cole is offering 250 million shares of common stock of Cole Credit Property Trust III and seeking to raise $2.5 billion. Since opening the Credit Property Trust III at the beginning of 2009, Cole has been garnering about $80 to $100 million per month in flows, says John Towle, Cole's chief marketing officer, "which is a pretty aggressive clip given the fact that most of the flows come during the end of the offering in these products."

Why has the REIT portfolio garnered so much interest? Towle says it's largely because of the solid annualized yield of 6.75%, and stable NAV of $10 per share. The REIT portfolio, he says, also offers investors an opportunity for "capital appreciation at the time of portfolio exit." As Cole builds out the Credit Property Trust III portfolio, "we are in a situation where we are buying high quality properties that are discounted from where they were two years ago," says Towle. "So over the long term this could translate into solid capital appreciation at time of portfolio exit."

Trent Meewes, a financial consultant with Wealth Management in Tallahassee, Florida, says his firm likes the Cole Property Trust III because Cole is "buying brand new assets [properties], and we don't have to worry about some of the overvaluation that's happened in the last couple of years." Plus, he says, Cole is paying cash for the properties so they're not taking on debt. All properties that Cole had acquired through the end of the second quarter were for cash. Meewes says he allocates about 10% of his clients' portfolio to the Cole Property Trust III. "We use these [non-traded REITs] to position people as they are getting close to retirement," he says. "For money that we don't expect to need for five years or so, we use the non-traded REITs." Non-traded REITs offer the "trade off between a little more risk, but a lot more return. CDs are paying 1.5% and 2%, and people just can't get by with that."

While it's hard to benchmark non-traded REITs' performance, Towle points out that in the second quarter, Cole Real Estate Investments was ranked the number one capital raiser in the non-traded REIT space.

Towle also notes that the Property Trust III offering is best for someone looking to diversify their equity portfolio or somebody looking to diversify their income stream." He says the REIT portfolio adds diversification because the correlation of direct real estate investments like non-traded REITs to traded REITs and equities is relatively low.

Blaser of National Planning Corp. says that Cole's REIT offerings--particularly Cole Property Trust II (which is closed) and III--have been a "great core holding for our clients." Blaser likes the fact that Cole deals in long-term financing. "The last thing you want in a recession is short-term leasing or financing events," he says. Towle adds that Cole focuses on long-term financing "so that our loans are not maturing in a relatively short term."

Reprints Discuss this story
This is where the comments go.