Zell: non-traded REITs lack alignment

The property doyen, who built several of the biggest publicly-traded REITs, told NYU’s real estate conference, ‘you don’t have billionaires running these [non-traded] funds and they don’t own any part of it themselves.’

Sam Zell does not like non-traded real estate investment trusts.

The Chicago-based entrepreneur has built some of the largest publicly-traded REITs in the past decades, some of which he exited, such as Equity Office Properties, and others that still dominate property verticals. At a conference on Wednesday for New York University’s real estate program, Zell took aim at the non-traded market.

“There are some things called non-traded REITs where you can pretend there’s no market and if there is no market, you don’t have anything to report,” he said. “If you’re in a commingled, non-traded, non-public fund, then nobody ever has to tell you how you’re doing. If you’re in a publicly-traded vehicle you have to mark-to-market every day.”

Zell noted the differences in non-traded and publicly-traded vehicles, particularly the lack of alignment between non-traded REIT managers and investors.

“You have to remember that you don’t have billionaires running these [non-traded] funds and they don’t own any part of it themselves,” he said. “The question is, ‘How can I function, do well and have the least amount of friction?’ Being in that business is a lot of friction.”

Zell did not name a specific non-traded REIT during his speech.

While the older cohort of non-traded REITs were criticized for lack of valuations, among other governance issues, a new generation of vehicles is seeking to appeal to a wider variety of institutional investors with frequent valuations. Unlike the legacy vehicles, the new non-traded REITs typically have better liquidity provisions, better dividend coverage, a more diverse portfolio of assets and an independently-controlled board of directors, as PERE previously reported.

JLL Income Property Trust, launched five years ago by LaSalle Investment Management, was the first such vehicle to be approved by a wirehouse. The product calculates daily net asset value, and its sponsor had co-invested $50.2 million in the $2.6 billion vehicle as of the fourth quarter, according to its prospectus.

In the last year, institutional managers have followed similar models, with Blackstone, Starwood Capital Group and TH Real Estate launching frequently-valued vehicles with significant sponsor co-investment. PERE understands that at least a half-dozen other managers are seriously examining the space as firms look to harness retail capital.