Northstar Healthcare is a Real Estate Investment Trust (REIT) that invests in healthcare businesses and retirement homes.
The investment was largely sold by independent broker-dealers such as First Allied, LPL, Cetera, Woodbury Financial, and others.
Vernon Litigation and Kristian Kraszewski have once again teamed up to file a claim on behalf of a Northstar Healthcare Income REIT victim. Our client is an 88-year-old widow that was sold this speculative investment. Northstar Healthcare is a Real Estate Investment Trust (REIT) that invests in healthcare businesses and retirement homes. Northstar Healthcare issued approximately $2 billion in shares to the public in 2014-2015. The investment was largely sold by independent broker-dealers such as First Allied, LPL, Cetera, Woodbury Financial, and others. Approximately 7% of the purchase value went to the brokers and broker-dealers as a sales concession or commission. Shares were issued between $10-$10.20 per share. Investors have subsequently suffered devastating losses of principal, and the company stopped issuing dividends in February 2019. Shares have traded as low as $2.20 on the secondary market. It is widely anticipated that the investment will experience further declines. The parent company to Northstar Healthcare’s CEO, Tom Barrack, has expressed real concerns that there will be widespread defaults and bankruptcies relating to the Corona Virus shutdown.
Real Estate Investment Trusts (REITs): Background on REITS
There are two types of public REITs: those that trade on a national securities exchange and those that do not. REITs in this latter category are generally referred to as publicly registered non-exchange traded, or simply non-traded REITs. Non-traded REITs are not listed on an exchange; their shares are illiquid and they have substantial valuation and redemption risks. Investors of non-traded REITs can typically only sell their shares after a holding period of a year and under a limited repurchase program.
Non-traded REITs, are illiquid investments with substantial risk. Non-traded REITs are opaque, do not re-price on a regular basis, are ridiculously expensive, have historically been outperformed by REITs that are traded on national exchanges, and carry significant risk. Most important to the Financial Advisor, non-traded REITs pay large commissions. In sum, non-traded REITs suffer from illiquidity, unreasonable commissions, poor diversification, and numerous conflicts of interest. Many of the dividend payments made by non-traded REITs do not actually represent the distribution of earnings from the REIT, but instead either represent debt or a return of principal.
Another issue with non-traded REITs is that they are typically highly illiquid investments. As no public secondary market exists for shares of non-traded REITs, investors are effectively unable to sell their shares even if the value of the REIT or its underlying assets significantly decrease. In order to mask this illiquidity and justify their reported valuations, many non-traded REITs offer grossly imbalanced repurchase programs through which investors can sell their shares to other investors or back to brokers at a significantly lower price. These repurchase programs come with restrictions. Investors can participate in the repurchase program only after an initial holding period, typically a year, and if there are a large number of shareholders wanting to sell, the non-traded REITs’ management reserves the right to limit the number of investors who are permitted to redeem their shares.
Non-traded REITs also tend to be financially weak, generating low or even negative return on equity. Comparing non-traded REITs with traded REITs demonstrates significant difference in value between a diversified traded REIT and the illiquid and non-traded REIT.
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