Evaluating Non-Traded Real Estate Investment Trusts

Prior to investing in any offering, individuals should evaluate its potential as an investment opportunity. When it comes to non-traded REITs, investors should consider several factors to evaluate this potential. These include the REIT’s portfolio composition, advisor and management team, and commonly used financial performance measures.

Portfolio Composition

When examining a REIT’s portfolio composition, it is important to assess the property’s type, location, details and lease structure.


  • Is the non-traded REIT a single sector or multi-sector portfolio?


  • Are properties in several geographical regions or in a specific area? Are the markets growing, stable or declining?
  • How close is the property to the area’s traffic generators?


  • Are properties managed or leased? If leased, are the leases short-term or long-term?
  • Is the lease for land and building (fee simple), land only with no buildings (ground lease) or building only with no land (lease hold)?
  • Does the lease provide regular rent increases?

Advisor and Management Team

The non-traded REIT’s advisor and management team also can greatly influence its performance. While past performance is not a guarantee of future results, three important factors to consider are the team’s overall strategy, expertise and track record.


Given the uniqueness of different real estate markets, individuals should assess the skill with which the management team has analyzed the non-traded REIT’s relevant market segment. For instance, do the current real estate market, economic landscape and future expectations appear to support investments in the REIT’s asset types?


It is also important to assess the expertise of the advisor and management team. For example, does the management team have expertise in acquiring and managing assets in different geographies, commercial real estate segments and economic cycles? In addition to real estate expertise, does the management team have operating experience and relationships in the asset class?


The advisor’s and management team’s track record also merits careful attention. While past performance does not guarantee future results, questions to consider for a non-traded REIT include:

  • How many REITs has the management firm taken full cycle? 
  • Has the management team managed REITs through multiple economic cycles?
  • For full-cycle REITs, did investors receive their principal back and make income and/or capital gains?
  • What does the prospectus state about the sponsor’s prior programs?


Non-traded REITs may have substantial costs and risks associated with the offering that could have a material impact on the investor's overall return. Investors should carefully read an investment's prospectus and discuss the pros and cons of any investment with their financial advisor.

Financial Measures

Finally, financial measures can be used to help assess a non-traded REIT’s performance. Like all specialized sectors, the real estate industry has adopted general standards for reporting on a non-traded REIT’s performance. The most common are funds from operations (FFO), modified funds from operations (MFFO) and Cash Flow From Operations. Individuals also should consider the REIT’s estimated net asset value (NAV) and distribution payout ratio.

REITs also are required to comply with generally accepted accounting principles (GAAP) when filing financial statements. This provides consistency in the statements investors can use when analyzing a company’s performance. Commonly used statements include cash flow from operations, the balance sheet and the income statement.


Regulations require depreciation and amortization to be recorded as expenses. Therefore, as a real estate portfolio grows, this expense becomes greater. However, real estate tends to appreciate more over time. Thus, expenses recorded due to depreciation and amortization may distort a company’s earnings. To counter this, the National Association of Real Estate Investment Trusts, an industry trade group focused on publicly traded REITs, created the FFO to measure a REIT’s earnings, since it adds depreciation and amortization back into the net income.


Some non-traded REITs also use the MFFO as a performance measure. It is important to note that MFFO calculations are not yet standardized across firms and are often reported in different ways. Since this calculation is not universally recognized and accepted, use this calculation in conjunction with other performance measures when evaluating a REIT. The MFFO is generally calculated as:


In response to recent regulatory changes, non-traded REITs typically show an estimated net investment amount in the early stages of its life cycle which is the net value of an investment by deducting sales commissions and related charges, such as organizational and offering costs when applicable. For REITs more than two years into their life cycle, the REIT must use the appraised value method, which requires independent third parties to provide material assistance in the process of determining the estimated value of a portfolio which the board of directors reports as estimated NAV per share.


Non-traded REITs calculate payout distributions as a percentage of cash
flow from operations (explained below), FFO and MFFO
for a given period. A healthy payout ratio is typically at or below 100 percent.


Cash flow from operations refers to cash flow before any financial activities; it is the cash version of net income. However, while net income includes noncash costs (e.g., depreciation) and excludes other cash expenses (e.g., equipment purchases), cash flow adjusts income figures to a cash basis.


When looking at a non-traded REIT’s balance sheet, it is important to compare data on a year-over-year or quarter-over-quarter basis. Preferably, a REIT should carry cash in total assets below 10 percent. If cash is above 20 percent in total assets, this can be a sign capital raised is not being deployed fast enough, and therefore may have a negative impact on future NAV. Examining the REIT’s assets and liabilities is a good starting point. Individuals should note that the evaluation of assets and liabilities might be different for new versus more established REITs. Always refer to the REIT’s latest financial filing on for more information.


Total Revenue
As with total assets, total revenue will likely rise every year or quarter during the capital raising phase of a non-traded REIT due to the increased number of properties held. However, in cases where the REIT is investing in properties under development, the revenues will be delayed until the properties are ready for tenants.

Total Expenses
Items to consider pertaining to total expenses for existing properties include property operating expenses (i.e., property tax, insurance and maintenance costs); general and administrative expenses (i.e., accounting, audit, legal, personnel, tax and other professional service costs); interest expenses (i.e., the cost to service the interest portion of outstanding debt); and miscellaneous expenses (i.e., costs that do not fall in the other categories).

Net Income
Net income is calculated by subtracting total expenses from revenue. While this is a GAAP requirement, may believe that net income may inaccurately assess a non-traded REIT’s operating results due to depreciation, as explained earlier.

In Brief

Though non-traded REITs have a limited operating history, a REIT's investment objective, portfolio composition, advisor and management team and financial performance can provide individuals with valuable information about its potential as a future investment. Investing in a non-traded REIT, however, is not suitable for all investors. Consequently, individuals need to carefully consider the factors that can impact the REIT's performance before making an investment decision. As with any asset class, individuals should read the prospectus and discuss all investment options and risk considerations with their financial advisor.

With an established track record in the seniors housing and healthcare real estate markets, CNL Financial Group (CNL) is an experienced sponsor that has longstanding relationships with leading industry operators.1 Launched in 2016, CNL Healthcare Properties II is a non-traded real estate investment trust (REIT) that builds on CNL's expertise to help investors, who are seeking income and long-term growth, capitalize on several large scale-trends that will play out in the United States over the coming decades.2

1 CNL Healthcare Properties II has a limited operating history. The prior performance of real estate programs sponsored by CNL may not be indicative of the future results of CNL Healthcare Properties II. During select periods, some REIT programs sponsored by CNL had a backlog of redemption requests that were unfulfilled and experienced net operating losses. In addition, two REITs have taken impairment charges on certain properties. During and after the global financial crisis in 2008, some REITs experienced declining performance which impacted the REITs valuation.
2 CNL Healthcare Properties II intends to qualify and elect REIT tax status beginning with the first year in which it commences material operations, the taxable year ending Dec. 31, 2017.

Investing in a non-traded REIT is a higher-risk, longer-term investment than many listed securities and is not suitable for all investors. Shares may lose value, or investors could lose their entire investment.

CNL Healthcare Properties II was recently organized and has a limited operating history on which investors may evaluate operations and prospects for the future. The REIT is a blind pool offering that is in the initial stages of property acquisitions and has made limited investments.

This is a best-efforts offering and if the REIT raises substantially less than the maximum offering amount, it may not be able to invest in a large variety of portfolio assets, which will subject investors to greater risk.

Non-traded REITs are illiquid. There is no public trading market for the shares. The REIT does not expect to offer a liquidity event in the near future and investors should be prepared to hold shares for an indefinite period of time. If investors are able to sell their shares, it would likely be at a substantial discount.

There are significant limitations on the redemption of investors' shares under the REIT's redemption plan. The REIT can determine not to redeem any shares or to redeem only a portion of the shares for which redemption is requested. In no event will more than 5 percent of the weighted average of all share classes of the outstanding shares be redeemed in any 12-month period. The REIT may modify, suspend or terminate the redemption plan at any time. Holding periods may be waived for qualifying events.

The REIT is obligated to pay substantial fees to its advisor, managing dealer, property manager and their respective affiliates for their services in managing the day-to-day operations of the REIT based upon agreements that have not been negotiated at arm's length, and some of which are payable based upon factors other than the quality of services. These fees could influence their advice and judgment in performing services. In addition, certain officers and directors of the advisor also serve as the REIT's officers and directors, as well as officers and directors of competing programs, resulting in conflicts of interest.

There is no guarantee of future distributions or if distributions will be paid at all. Due to the high levels of investment costs and fees incurred during the REIT's initial phase, distributions will not be fully covered by cash flow from operating activities and will be paid from expense waivers, borrowings and offering proceeds. For the six months ended June 30, 2017, approximately 13 percent of cash distributions were covered by operating cash flow and 87 percent were funded by offering proceeds. For the year ended Dec. 31, 2016, distributions were not covered by operating cash flow and were 100 percent funded by offering proceeds. Distributions paid from sources other than operating cash flow, now and in the future, are not sustainable and can reduce investors' overall return.

If the REIT fails to maintain its qualification as a REIT for any taxable year, it will be subject to federal income tax and net earnings available for investment or distributions would be reduced.

No offering is made to residents of New York, Maryland or any other state, except by a prospectus filed with the Department of Law of the state of New York, the Maryland Division of Securities or the respective state securities administrator. Neither the U.S. Securities and Exchange Commission, the attorney general of the state of New York, the Maryland Division of Securities nor any other state securities administrator has passed on or endorsed the merits of the REIT's offering or the adequacy or accuracy of this piece or the REIT's prospectus. Any representation to the contrary is unlawful.

This material is provided by CNL and its affiliates. This material is intended for general use with the public. CNL Healthcare Properties II is not undertaking to provide investment advice for any individual or any individual situation, and an investor should not look to this material for any investment advice. CNL and affiliates have financial interests that are served by the sale of CNL Healthcare Properties II's shares.

This is not an offer to sell nor a solicitation of an offer to buy shares of the REIT. Only the prospectus makes such an offer. This piece must be read in conjunction with the prospectus in order to understand fully all the objectives, risks, charges and expenses associated with an investment and must not be relied upon to make a decision. The information herein does not supplement or revise any information in the REIT's public filings. To the extent information herein conflicts with the prospectus, the information in the prospectus shall govern.

Managing dealer of CNL Healthcare Properties II is CNL Securities, member FINRA/SIPC. Shares are offered to the public through selling firms. Selling firms are reminded that the REIT's communications must be accompanied or preceded by a prospectus.


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