Highlands REIT: Did InvenTrust Mislead Investors?
When Inland American Real Estate Trust changed its name to InvenTrust Properties and spun off its non-core assets into subsidiary Highlands REIT in 2015, it suggested in public statements that Highlands would deliver investors a return by liquidating those assets and distributing net proceeds from the liquidation. Instead, according to a 2019 report by Crain’s Chicago Business, it went the other direction, purchasing a series of new properties. Not only did its investors not get a return, they didn’t even get any dividends. And because Highlands REIT is a non-traded REIT, investors looking to sell their shares face an uphill battle. “The company seems to be run for the benefit of management,” one such investor told Crain’s, “not the benefit of investors.”
What Are Real Estate Investment Trusts?
A real estate investment trust, or REIT, is an investment vehicle that uses pooled funds from a group of investors to buy and operate real estate properties. REITs may be can be publicly traded or privately held. While they have the benefit of giving investors access to real estate investments—and the promise of steady income streams from them—non-traded REITs may be particularly risky for short-term investors and even long-term investors. Publicly traded REITs, which are generally traded on major stock exchanges, are often associated with liquidity and stable cash flows, but they are also affected by the ebb and flow of the markets, and like their non-traded counterparts, they may come with high fees. As Investopedia notes, REITs also have fairly low capital appreciation.
What Are the Risks of Non-Traded REITs?
FINRA has warned investors to exercise caution when weighing investments in real estate investment trusts, in particular non-traded REITs, stating in a 2016 investor alert that they are “generally illiquid, often for periods of eight years or more.” They may also have limited early redemption opportunities and significant fees, leading FINRA to conclude that they are “rarely, if ever, suitable for short-term investors,” and they can even present liquidity problems for long-term investors. As a 2011 investor alert noted, non-traded REIT distributions “are not guaranteed and may exceed operating cash flow.” Highlands REIT, as a non-traded REIT that does not pay distributions, is an example of this.
What Is Highlands REIT?
Highlands REIT was created by InvenTrust—formerly known as Inland American Real Estate Trust—a non-traded REIT founded in 2004 that raised $8 billion from its investors, according to Crain’s. As of 2013, Investment News reported that year, Inland American was worth $10.8 billion. It was also the subject of an SEC investigation into “whether there had been violations regarding the REIT’s management fees, transactions with affiliates and distributions to investors.” The SEC ultimately did not take any enforcement action against Inland American; however, it did file suit against its former business manager and property manager in 2015, according to Investment News, alleging they breached their fiduciary duties “in connection with the failure to disclose facts and circumstances associated with the payment of fees to related parties.”
That same year, Inland American—now InvenTrust Properties Corp.—said in an SEC filing (and a related press release) that it had formed Highlands REIT, a wholly owned subsidiary that would hold its non-core assets. “We are pleased to announce the disposition of our remaining ‘non-core’ assets in a manner that is expected to maximize the value of these assets,” InvenTrust’s president and CEO said in a statement about the move. “Through this spin-off, we expect Highlands will be better-positioned to provide stockholders with a return of their investment by liquidating and distributing net proceeds from the disposition of their assets in a more efficient manner.”
Did Highlands REIT Mislead Investors?
Highlands indeed sold off some of its properties, according to Crain’s, including “distressed office buildings” and an unused prison in Texas—which Inland American bought for $21.1 million in 2008, and which Highland sold for $3.6 million in 2018. Then, in 2017, it began buying properties again, paying almost $91 million in acquisition costs by 2019 and obtaining “a $50 million credit agreement that can be used for multiple purposes, including acquisitions.”
As of 2019, Highlands reportedly employed nine full-time employees who worked out of a co-working space in Chicago. “Relative to its size,” Crain’s noted, “Highland’s corporate expenses are huge,” with a total of $12.6 million in general and administrative expenses in 2020: “4.1 percent of the estimted [sic] total value of its assets,” far above the average 0.5 percent of total assets that G&A expenses comprise at other, publicly listed REITs. In 2018, the REIT’s president and CEO earned $2.8 million.
As Crain’s suggested, Highland’s investors thought the REIT would liquidate its properties and wind down. In an interview with the publication, one industry expert voiced confusion at Highland’s recent moves. “We do not understand what this company is doing based on our understanding of what it was expected to do,” he said. An investor in the REIT was blunter, arguing that the company’s executives were trying to “keep their jobs and keep their salaries, even though it’s not what was intended… it’s an absolute outrage.”
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