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Avoid High-YTB Investments

July 20, 2013 | About:
Avoid High YTB Investments

YTB = Yield to Broker.

People with serious money are continuously subjected to investment offers. Many of them make sense only for the person earning the commission for brokering the deal. The proffered investments can range from total scams like the Bernie Madoff fiasco, to annuities, limited partnerships or other assorted financial offerings.

Many are legitimate. Most of them offer subpar potential rewards served up with doses of higher than normal risk. Over the course of your lifetime, avoiding bad deals can be just as important to your net worth as getting into good ones.

Any investment that needs a small book to explain itself should probably be automatically disqualified from consideration. Some years ago an insurance salesperson presented me with a formal fixed-annuity proposal that ran more than 1500 pages! Even the agent couldn’t explain many of the details. I didn’t buy.

A friend asked me to evaluate the American Realty Capital Global Trust. It was being touted to him but their offering document was too daunting for him to decipher.

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Even if you believe in the proposed international sale-leaseback concept, the fully disclosed Risk Factors should give you pause. The 'Risk Factors' segment ran for three full pages of fine print. You can read them all at www.arcglobaltrust.com. All the graphics in this article relating to ARCG come directly from the company’s own documents.

Here are just some of thehighlights lowlights they mentioned.

· High Risk– Purchase these securities only if you can afford a complete loss of your investment.

· Distributions are not guaranteed.

· ARC Global is a “blind pool” that does not yet own any investments.

· The REIT will face “unique risks” associated with foreign real estate.

· There are substantial conflicts of interest between investors, sponsors as well as advisors, dealer-managers, and affiliates.

· Early distributions may be simply a return of your own capital.

· ARC Global gets higher fees based on higher NAVs. They thus have an incentive to overstate NAVs. NAVs may not reflect true values.

· The Trust may use up to 300% leverage. This increases risk.

· The sponsor manages other real estate programs which compete for management's time and attention with respect to ARCG.

· The management of multiple REITs by the executive officer and advisor may cause operating results to suffer.

· There is no public market for these securities and none is likely to develop.

· The entire REIT Structure could be denied or rescinded by the IRS (see below) making all projections moot.

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The details of the trust’s share repurchase plan is laughably biased against investors if they want out. Even those terms cannot necessarily be counted on (see details below).

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Taking high risk should be justified by a chance at exceptional returns. American Realty Capital proudly boasted that “the completed full-cycle liquidity event for American Realty Trust Inc., cumulative profit for full year investors (2006 – 2012) was 40%.” That equates to a shade under 5.8% annualized with yearly compounding.

The historical FDIC bank CD rates in effect in 2006? Anyone willing to lock in for 5-years could have earned 5.707% with zero risk. Even 1-year, fully guaranteed bank CDs paid 5.28% back then.

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The first round investors were lucky to escape with a moderate rate of return after assuming lots of uncertainty that they did not get paid extra for. This next iteration looks more risky than the original.

Illiquid, high risk propositions are sold, not bought. I advised my friend to pass on this one.

Disclosure: No position

See more of my thoughts on solid, value investing here http://marketshadows.com/value-investing

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 4.9/5 (12 votes)

Comments

pravchaw
Pravchaw premium member - 1 year ago
Another great article Paul. Unfortunately lots of people will get fleeced by the promoters, many in retirement communities who will think they are investing in safe investments paying them safe returns. Many of the brokers who sell them will be imbedded in their society and earn an handsome commission. Some of the worst investment in which I and my extended family have been sold to us by these "friend and family" types.
Dr. Paul Price
Dr. Paul Price premium member - 1 year ago
Pravchaw,

These non-publicly traded type offerings have another benefit to the borkers that sell them.

Buyers can't know how bad the returns were until they are all done- often many years later.

By then, the person who pushed them is long gone and can't be held accountable.

See my recent Guru Focus article on the Gerber Life Grow-Up College Savings Plan for another example of a horrible idea that is being pushed hard all day, every day.

http://www.gurufocus.com/news/223052/the-growup-plan-for-college-savings-really
Dr. Paul Price
Dr. Paul Price premium member - 1 year ago


Tuesday WSJ noted that American Realty Capital was able to raise $3.6 billion for nontradable REITs in the first six months of 2013.

The WSJ questioned whether the company's rapid capital expansion could be put to work effectively.

That is especially true since the overall industry is on pace to raise $17 billion this year. All that cash chasing the same properties is going to make for high purchase prices and subsequently lower ROIs.

The SEC has been probing whether brokers and/or REITs themselves have been misleading in risk disclosure, high fees and the illiquidity of their offerings. The investigation noted that some REITs eliminated dividends or suspended redemtpions during the last downturn.

The quality of tennants has been deteriorating overall as more money chases the finite number of top-quality retailers.

Future returns are unlikely to match those of the past. Historical returns were not anything special to begin with.

Caveat Emptor.

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