Investor Lawyers Blog
Investors in Phillips Edison Grocery Center REIT II (“Phillips Edison II”) were recently solicited by third-party real estate investment management firm MacKenzie Realty Capital, Inc. (“MacKenzie”) in relation to a mini tender offer to purchase Phillips Edison II shares at $14.89 per share. Investors who purchased Phillips Edison II shares through the initial offering acquired their shares at $25 per share (and at $23.75 per share for shares subsequently acquired through the dividend reinvestment program). Accordingly, investors seeking immediate liquidity who elect to participate in the MacKenzie tender offer will incur substantial losses of approximately 40% on their initial investment (excluding commissions and fees, as well any dividend income received to date).
Phillips Edison II was incorporated in June 2013 and is a publicly registered, non-traded REIT. As set forth in its prospectus, Phillips Edison II was “formed to leverage the expertise of our sponsors… and capitalize on the market opportunity to acquire and manage grocery-anchored neighborhood and community shopping centers located in strong demographic markets throughout the United States.” As a publicly registered non-traded REIT, Phillips Edison II was permitted to sell securities to the investing public at large, and as such, the non-traded REIT was marketed nationwide to numerous unsophisticated retail investors. In certain instances, some investors were not fully informed by their financial advisor as to the complex nature and risks associated with non-traded REITs.
Non-traded REITs pose many risks that are often not readily apparent to retail investors, or adequately explained by the financial advisors and stockbrokers who recommend these complex investments. To begin, one significant risk associated with non-traded REITs has to do with their high up-front commissions, typically between 7-10%; in the case of Phillips Edison II, its prospectus indicates that investors were charged a “selling commission” of 7%. In addition to high commissions, non-traded REITs like Phillips Edison II generally charge investors for certain due diligence and administrative fees, ranging anywhere from 1-3%; as set forth in its prospectus, Phillips Edison II charged investors a 3% dealer manager fee of up to 3% of gross offering proceeds. Such high commission and fees act as an immediate “drag” on an investment.
Furthermore, non-traded REITs like Phillips Edison II are generally illiquid investments. Unlike traditional stocks and mutual funds, non-traded REITs cannot be readily sold and resold on deep and liquid national securities exchanges. Typically, investors in non-traded REITs can only exit their investment position through redemption directly with the sponsor, and even then on a limited basis, and often at a disadvantageous price. Or, investors may be able to sell shares through a limited and fragmented secondary market. Finally, investors may be presented with limited market-driven opportunities — such as a tender offer — to sell their shares at a disadvantageous price.
Investors in Phillips Edison II and other non-traded REITs may have viable FINRA arbitration claims if their stockbroker or financial advisor made an unsuitable recommendation to purchase the investments or solicited the investments via a misleading sales presentation. Investors may contact Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or via email at newcases@investorlawyers.net for a no-cost, confidential consultation.