Cornell Report Finds ‘Private’ Hotel REITs Put Shareholders At Disadvantage

ITHACA, NY—According to a report from Cornell’s Center for Hospitality Research, non-traded public REITs, or what are also referred to as “private” REITs, can put their long-term investors at a disadvantage through their unique structure. Titled “Non-traded REITs: Considerations for Hotel Investors,” the report finds that the non-traded REITs, which currently include the Apple REIT Cos. and Inland American Real Estate Trust in the hotel industry, can be attractive buy-and-hold investments for income-oriented investors because of their high dividend payouts. However, the report added that those payouts are diminished for long-term holders. Report authors John Corgel and Scott Gibson further explained that non-traded REITs’ shares are sold through broker-dealers and the shares do not trade on public exchanges. Therefore, the returns on the non-traded REIT shares for long-term holders diminish as a result of the fixed share prices, which do no change even when the value of the underlying hotel assets appreciate. Those gains are then absorbed by commissions and fees when new investors emerge. Corgel and Gibson do agree that the relatively high dividend payouts for the non-traded REITs can mitigate the reduced return for long-term shareholders. But they suggest that a more equitable approach might be to revalue the shares to reflect asset value changes. That would allow all investors to share in the hotel asset appreciation. Instead, Corgel noted, many non-traded REITs pay out dividends in excess of their funds from operations, which is an unstable situation.