The securities lawyers of Gana Weinstein LLP are investigating recommendations by brokerage firms for their clients to invest in NorthStar Healthcare Income Inc., (NorthStar Healthcare) – a non-traded real estate investment trust (Non-Traded REIT). According to newsources, NorthStar Healthcare has suffered massive losses and may only be worth less than 30 cents for every dollar purchased. In addition, NorthStar Healthcare no longer distributes a dividend – which previously had only been a return of investor principal and not funds from any business operations. As is too common in the brokerage industry, firms fail to understand the flawed Non-Traded REIT business model and only recommend these products for their 7% commissions – not because they benefit investors.
According to the NorthStar Healthcare’s website, the investment formed to originate, acquire and asset manage equity and debt investments in healthcare real estate. NorthStar Healthcare claims that it is focused on making investments in the needs-driven senior housing sector including independent living facilities, assisted living, memory care, and skilled nursing facilities. NorthStar Healthcare launched in February 2013 and raised total gross proceeds of $2 billion, including $225.3 million through its distribution reinvestment plan. The company claims to have a $2.4 billion portfolio of 652 properties as of the third quarter of 2018.
According to The DI Wire, in December 2017, NorthStar Healthcare reduced its distribution rate from 6.67% to 3.31%. One year later NorthStar Healthcare lowered the net asset value of its common stock from $8.50 per share to $7.10 per share. In addition, in October 2018, NorthStar Healthcare told shareholders that it was suspending its repurchase program – unless the shareholder was dead or had a qualifying disability.
However, these valuation metrics are incredibly suspect. First, according to NorthStar Healthcare’s disclosures the company has not paid investors any return on investment in over three years and has instead merely returned investor’s original investment capital while taking on massive loans in order to return those funds. Accordingly, NorthStar Healthcare’s own financials as of March 2019 show an investor equity of only $900 million – where did the other $1.1 billion raised go? The massive loss of investor capital has caused secondary market sources for non-traded REITs to list NorthStar Healthcare for only $2.85 per share indicating a massive loss for investors.
Our firm often handles cases involving direct participation products (DPPs), private placements, Non-Traded REITs, and other alternative investments. These products are almost always unsuitable for middle class investors. In addition, the brokers who sell them are paid additional commission in order to hype inferior quality investments providing perverse incentives for brokers to sell high risk and low reward investments.
According to studies, non-traded REITs have historically have underperformed even safe benchmarks, like U.S. treasury bonds – meaning that non-traded REITs provide paltry investment returns considering the risk an investor takes. Alternative investment products like oil and gas partnerships, REITs, and equipment leasing programs are only appropriate for a narrow band of investors under certain conditions due to the high costs, illiquidity, and huge redemption charges of the products, if they can be redeemed at all.
However, due to the high commissions brokers earn on these products they sell them to investors who cannot profit from them. These products have become so popular among brokers without providing any benefit to investors that many states now limit investors from investing more than 10% of their liquid assets in Non-Traded REITs. Many states impose these limitations because its understood that that they provide virtually no benefit to investors in relationship to their risks.
Investors often fail to understand that they have lost money until many years after agreeing to the investment. In sum, for all of their costs and risks, investors in these programs are in no way additionally compensated for the loss of liquidity, risks, or cost.
The investment lawyers at Gana Weinstein LLP represent investors who have suffered investment losses due to allegations of wrongdoing. The majority of these claims may be brought in securities arbitration before FINRA. Our consultations are free of charge and the firm is only compensated if you recover.