Investors Seeking Liquidity in Carter Validus Mission Critical REIT II Face Limited Options
In a recent SEC filing, Carter Validus Mission Critical REIT II, Inc. (Carter Validus) disclosed recent actions that may lead to investors facing limited liquidity options. The filing revealed the decision “to temporarily suspend share repurchases under the Company’s share repurchase program” as of April 30, 2020 due to uncertainties surrounding and impacts related to the COVID-19 pandemic. The suspension was “effective with repurchase requests that would otherwise be processed on the third quarter repurchase date, which is expected to be July 30, 2020.”
While Carter Validus has indicated that they will continue to process share repurchase requests in the event of a shareholder death, investors who wish to sell some or all of their investment position unfortunately face very limited liquidity options. These limited options could include participating in a tender offer (to the extent one exists), or perhaps selling shares on a fragmented and inefficient secondary market. For these reasons, investors in Carter Validus may have FINRA arbitration claims to recover their losses, if the investment was recommended by a financial advisor without a reasonable basis, or the investor was otherwise misled concerning the investment’s many risk components.
Formed as a Maryland corporation in January 2013, Carter Validus is structured as a real estate investment trust (REIT) that invests in “quality income-producing commercial real estate, with a focus on data centers and healthcare properties.” As of June 30, 2020, the Tampa, Florida headquartered REIT owned 152 properties in 67 metropolitan statistical areas in the United States.
As a publicly registered non-traded REIT, Carter Validus was permitted to sell securities to the investing public at large, including numerous retail investors. The shares were initially priced at $10 per share. In April 2019, Carter Validus Critical REIT II entered into a merger agreement with an affiliated REIT, Carter Validus Mission Critical REIT I. Finalized in late 2019, the merged company had an approximate value of $3.2 billion. In connection with the merger, the Board of Directors of Carter Validus assigned a net asset value (NAV) of $8.65 per share for the Company’s Class A, Class I, Class T, and Class T2 shares of common stock. Carter Validus noted that while the post-merger value of its real estate portfolio increased, the NAV was nevertheless impacted by transaction costs associated with the merger, among other things.
Non-traded REITs like Carter Validus pose many risks that are not always apparent to retail investors, or adequately explained by all of the financial advisors who might recommend these complex investments. One significant risk associated with non-traded REITs has to do with their high up-front commissions, typically between 7-10% of the initial capital invested. In addition, non-traded REITs generally charge investors for certain due diligence and administrative fees, ranging anywhere from 1-3%. Such high commissions and fees act as an immediate drag on investment performance.
Moreover, non-traded REITs are notoriously illiquid investments. Unlike traditional stocks and mutual funds, non-traded REITs like Carter Validus do not trade on a national securities exchange. Unfortunately, many uninitiated investors in non-traded REITs have come to learn too late that their ability to exit their investment is very limited. Typically, investors in non-traded REITs may only exit their investment through a redemption directly with the sponsor, and even then, on a very limited basis at the discretion of the sponsor. Other possible avenues for investors in non-traded REITs seeking liquidity include participating in a tender offer, often at a disadvantageous price.
Such is the case with Carter Validus. Because the company has recently restricted its share repurchase program, investors seeking liquidity are left with limited options. For example, third party real estate investment management firm MacKenzie Realty Capital, Inc. (MacKenzie) recently made a tender offer to purchase up to 1 million shares of Carter Validus Mission Critical REIT II common stock for $4.05 per share (set to expire on June 8, 2020). Based upon the initial offering price of $10 per share, any investor who participated in the tender offer by MacKenzie at $4.05 per share would have incurred substantial losses (exclusive of any distributions received to date).
The attorneys at Giarrusso Law Group LLC have extensive experience in handling claims on behalf of investors in non-traded REITs, as well as other complex and illiquid investment products. Investors may pursue a claim to recover monies through securities arbitration before FINRA, or in some instances, through litigation. Investors who wish to discuss a possible claim are invited to contact us by telephone at (201) 771-1115 or by email at info@gialawgroup.com for a no-cost, confidential consultation.