As portended in the January issue of NLR Industry Insights, 2014 is proving to be an important year for the Non-Listed REIT industry. Sec-FINRA SR 2014-006 is closer to becoming a reality, American Realty Capital’s hold on the industry seems to be getting even stronger, and Wall Street’s interest in the industry is evolving.

I wrote about SEC-FINRA SR 2014-006 earlier this year. On May 20th the SEC entered into proceedings. Since that time additional discussions have taken place between the industry and FINRA. On July 11th FINRA made additional recommendations to the SEC and we will now enter into another short SEC comment period.

Since I interviewed Nick Schorsch for the last issue of NLR Industry Insights, American Realty Capital and its affiliated companies have continued to dominate the headlines. According to Investment News, Larry Roth intends to double the size of the broker dealer over the next five years, SK Research’s first due diligence conference was well attended, and most recently, there was the first public expression of concern by at least one significant investor about the torrid pace at which ARC has been growing.

This month I am focusing on Wall Street’s interest in accessing capital through the independent broker dealer channel. We saw early indications of interest when Clarion brought the first NAV product to market. Clearly it was ahead of its time. The implementation of FINRA RN 11-44 was not forthcoming and the market did not respond. Some sponsors still believe the structure will become viable if and when SR 2014-006 is implemented.

The next indication was Jones Lang LaSalle introducing their version of a non-listed REIT on the Merrill Lynch platform. Jones Lang LaSalle Income Property Trust, Inc. (“JLL”) is described as an institutionally-managed, non-listed, daily valued, perpetual life REIT. Based on current industry standards sales at Merrill were strong for a new sponsor bringing a new product to market. Indications are that JLL is now moving into the independent broker dealer channel.

The majority of current interest is from institutional quality asset managers. Their motivation for entering the space is instructive. Of course there are those that see the amount of capital being raised and want to enter the market for that reason alone. They are many times less sophisticated and their chances for success are minimal. Some simply want, as part of a sound business plan, to diversify their capital sources. Their commitment is usually not great enough to overcome the formidable time and cost barriers. It is often the more sophisticated firms that recognize the attractiveness of accessing a predictable stream of capital over a long period of time and are willing and able to make the necessary time and cost commitment. Many of them acknowledge the problems that come from raising hundreds of millions of dollars in an IPO over a short period of time. A reliable, predictable stream of new capital is attractive to them.

The institutional quality firms that make the commitment and enter the space represent an important dynamic. They bring with them a level of sophistication, a commitment to quality and a focus on performance that raises the bar for the entire industry. The products they bring to market are in many instances creatively structured to address some of the perceived weaknesses in the current products. One of my clients is offering preferred stock in their public REIT as a fixed income alternative. Another client is making the midstream energy MLPs more accessible to retail investors and doing it in a tax advantaged way. Interval funds are gaining popularity. Even sponsors raising capital through Reg D offerings are bringing a level of excellence to the Reg D market that makes them once again attractive to even the most conservative independent broker dealers.

Our industry and more fundamentally the investors in our products are benefiting from the value these asset managers bring with them. While capitalization remains strong and appears to be growing, my optimism is driven more by the caliber of the firms that are being attracted to and entering the IBD channel. These are the firms that will determine the future of the industry.

Martel Day
Principal
NLR Advisory Services, LLC