AEI Capital launches new real estate trust vehicle

  • Article by: JENNIFER BJORHUS , Star Tribune
  • Updated: October 6, 2011 - 9:25 PM

Regulators have warned of abuses with products known as nontraded REITs, but a St. Paul firm thinks it can do it right.

AEI Capital Corp. is a well-established St. Paul company known for conservative investments in commercial property.

So why is it venturing into a murky corner of the real estate investment trust world?

AEI is launching a public but non-traded $300 million real estate investment trust, or REIT. It won't be listed on a stock exchange, as most REITs are, but is considered public in the sense that it will be registered with the Securities and Exchange Commission and widely available to the public.

Such REITs -- about 20 percent of the total U.S. REIT market -- have been booming, even through the Great Recession. But the SEC and the Financial Industry Regulatory Authority have turned up the heat on the little-known sector over high fees, inaccurate pricing and other issues.

AEI's president, Robert Johnson, said he supports regulators' efforts and plans to address the misgivings critics have head-on with his new product, the AEI Core Property Income Trust.

He said he plans to focus on a distinct, low-risk part of the commercial real estate called "net-leased real estate," or properties occupied by a single, long-term tenant that pays all the property's operating expenses, such as a Walgreens or Best Buy.

"We can do it right," Johnson said. "What we're really talking about here is good management. Just because Denny Hecker was out there doesn't mean that you or I shouldn't buy a new car."

On Tuesday, the Financial Industry Regulatory Authority, or FINRA, issued an investor alert on non-traded REITs, warning about high front-end fees, share prices not being accurately reported and the fact that distributions aren't guaranteed and can exceed operating cash flow, leading to an investor's principle being returned to them.

In May it filed a disciplinary complaint against a company in Syosset, N.Y., David Lerner Associates Inc., that claimed it was soliciting unsophisticated, elderly investors and continuing to report share values at $11 over a long period of time despite market changes, performance declines and increased debt loads.

The SEC, meanwhile, has warned that it will be checking annual reports to see whether non-traded REITs are disclosing how they reach their share price valuations.

Sean P. Smith, an investment analyst at Edina-based Accredited Investors Inc., said his company generally doesn't use non-traded REITs because of liquidity and fee concerns. "I think any investors who do get into these investments are blinded by the yield potential and the stability potential," Smith said.

Johnson said he expects to get SEC approval for his new REIT by the end of the year. He said he thinks it will be the first public non-traded REIT sponsored by a Minnesota company.

His company "kind of avoided" doing a non-traded REIT for years, he said, but became convinced it had to join in because of demand from broker-dealers and financial planners.

"Brokerage firms do not have many high-commission products to sell," Johnson said.

Mutual funds pay brokers commissions of 2 to 4 percent, he said. Non-traded REITs typically pay out 7 to 8 percent.

Investors are attracted by high yields. Non-traded REITs paid an average 6.5 percent in the second quarter, according to Blue Vault Partners, an Atlanta company that tracks the sector.

It's all helped fatten the industry, which had total assets of nearly $80 billion in June, up from just $8.4 billion a decade ago.

Johnson said AEI has structured the new AEI Core Property Income Trust to lower risk. Where most non-traded REITs take on debt to help buy properties, the AEI Core Property trust will only invest with cash from investors.

Jennifer Bjorhus • 612-673-4683

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