The real estate investment trust (REIT) industry provides real estate companies and institutions valuable opportunities for raising capital. More specifically, the non-traded REIT (NTR) vertical is a newer subset of the REIT space providing investors with unique benefits.
When they first launched, NTRs, like any new investment vehicle, went through growing pains. The product you see today is much different than the first iterations. Now the industry is trying to overcome new challenges as a result of the pandemic.
Rich Babineau, Director of Issuer Solutions Division at Mediant, and Kirit Patel, Managing Director, Global Capital Markets and National REIT Leader at Donnelley Financial Solutions (DFIN), share their insights on what they are seeing in the marketplace and strategies to help position clients for a triumphant return in 2021 and beyond.
Q: What have been some of the big trends for non-traded REITs in 2020?
Rich: One of the big trends is consolidation (mergers), particularly among non-traded REITS, which have multiple products that they want to bring together. We're also seeing activity where companies might be interested in selling off NTRs to a private or public company.
Kirit: I agree with Rich. As background, when the non-traded REIT space launched several years ago, these REITs were an alternative investment vehicle for investors who wanted to protect their investments from the volatility of the stock market but still receive a moderate return. NTRs were expecting to have a 5-7-year hold period and then an exit which would also provide another opportunity for investors to receive a bump in their investment through capital appreciation. The industry had a lot of pressure to go full cycle, but many NTRs were unable to complete this full cycle in the intended time horizon. As an alternate to the expected exit, a lot of these NTRs are combining their different products to create a more efficient single REIT with some diversity in their holdings. Hence the reason we are seeing the trend Rich mentioned.
Q: What are the challenges you are seeing with proxy communication and gathering votes from shareholders of non-traded REITs and how do you help address them?
Rich: Getting shareholders to engage in a proxy event is one of the biggest challenges. Shareholders are increasingly apathetic with respect to proxy voting and therefore can be difficult to reach during a solicitation campaign.
We take a strategic approach and leverage the right communication tools at the right time to achieve the best results. Some of these tools include pre-recorded messages from the company’s president or chairperson stressing the importance of the proxy event and encouraging shareholders to vote; helping the NTR engage with financial advisors in advance of the proxy; and using electronic delivery for reminder mailing efforts.
NTRs are also looking for alternative communication channels to achieve higher shareholder engagement. We offer SMS texting, Alexa, and social media as additional channels and tools to drive engagement and achieve quorum more quickly.
Another challenge NTRs face when conducting a proxy effort is the lack of actionable shareholder data and real-time voting results. Leveraging historical shareholder proxy activity is a critical component to an effective solicitation strategy and allows NTRs to be better informed around vote projections. Our real-time voting and postal tracking tools reduce solicitation costs and enable funds to accurately measure quorum attainment.
Q: What are some of the trends you are seeing for digital shareholder meetings?
Rich: Mediant was part of working group that recently published a best practices guide for digital meetings. The group identified that the existing “proxy plumbing” infrastructure makes it difficult for some beneficial owners to register for a digital meeting and get a legal proxy entitling them to vote at the meeting. This is important for funds because only a validated shareholder’s vote counts toward quorum.
Another trend the group found was that supporting shareholder proposals was a challenge. Going forward, funds need to better integrate shareholders into the planning of the meeting and also keep the lines of communication open with their shareholders before, during and after the meeting.
Q: What are some keys to producing a successful digital shareholder meeting?
Rich: Providing equal access—a remote shareholder should have the same ability to attend a meeting, vote, ask questions and present a shareholder proposal as an in-person attendee.
In addition, we tell our clients to make sure their disclosure and communications about their digital meeting are accurate and clear. Investors need to know how to register and gain access. It's really about setting up your proxy campaign to communicate that specific information to your investors so they are engaged and it's easy to follow.
I also tell our clients to treat the digital meeting like they normally would with a room full of people. The meeting will be scripted and there will be time for accepting final votes as well as addressing questions from shareholders in real time. I require clients to do a dry run as well so there is no angst over the digital portion of the meeting.
Q: Investors of non-traded REITs have shown increased interest in environmental, social and governance (ESG) investing. What would you say has been driving this interest?
Kirit: I think a lot of the interest is due to the investor base widening from primarily retail-type investors to include more institutional investors. Also, the sponsor profile has changed in the non-traded REIT space. Initially, it was real estate companies (small to moderate sized) that were raising money through this structure and now larger institutional players have entered the space (i.e., Blackstone, Starwood, JLL, etc.). These organizations have a broader investor base, and those investors are starting to ask questions about ESG practices and compliance. What was once mostly a focus for traded REITs is now becoming a hot topic for non-traded REITs too.
Q: Regarding reporting transparency for investors for non-traded REITs in ESG, what challenges, if any, have REITs encountered in doing that?
Kirit: One widespread problem is the lack of standardization for ESG reporting data. Within different industries, you have different metrics and targets that are material to the company. We're starting to see companies reporting according to emerging global standards, like the Sustainable Accounting Standards Board (SASB).
Another trend is that some of the NTRs are looking at ESG reporting as a value creation activity. In these cases, they consider it a due diligence process that helps them evaluate the risks in their portfolio, which is helpful if they are considering a sale or an acquisition.
One other observation is the growing impact of ESG on credit risk as evaluated by the largest credit rating agencies. Within the last two years, S&P Global bought RobecoSAM’s ESG Ratings Business, Moody’s acquired a majority stake in Vigeo Eiris, a global leader in ESG research, data and assessments, and Fitch developed its own proprietary model.
Q: Is there a direct correlation in terms of ESG investments and credit worthiness, or is it a lot more complex than that?
Kirit: Yes, several studies conclude that companies with the best ESG are aligned with a low-risk profile.
Some of the material ESG factors the credit agencies or private investors demand are reported very thoroughly by REITs, such as energy efficiency of assets, water efficiency of assets, and baseline emissions. However, one of the pain points is that some of the social and governance factors are missing from the REITs disclosure. For example, within corporate governance, these factors could include gender participation, diversity statistics, community engagement, and employment practices. If a company does not have accountability or a diverse board, that's an issue on the social front.
On the other hand, it’s a major issue if the environmental endeavors and programs are not aligned with local, state and federal laws. These are all very important points that any public company, regardless of industry, needs to remember.