The Good, the Bad and the Ugly of Secondary Liquidity for REITs and BDCs

An Open Letter to the Financial Advisor Community

Hello. My name is Brian King and I used to be one of you, a financial advisor.

Like all of you, I rose each morning with my clients on my mind, prepared to leave no stone unturned in my quest to optimize their respective portfolios. I was in the game for five rewarding years, and I learned lessons I still draw upon today.

I entered the advisory ranks as the dotcom bubble was bursting and, in that perilous time, it was particularly paramount to find investment opportunities for my clients. Now, more than 20 years later, we find ourselves in a similarly treacherous landscape with the country in a recession and the stock market struggling to find its footing.

Fortunately for investors, there is still alpha to be achieved and it remains incumbent upon the advisor community to seek liquidity opportunities for its clients. This is especially important when one considers recent market events that have not played out well for all shareholders, notable events that might have been avoided by working with a true secondary market.

Let’s look at three instances where questions can legitimately be asked: Phillips Edison & Co.’s (PECO) issuer-led tender, Modiv Inc.’s (MDV) initial public offering and Cion Investment Corp.’s (CION) tranched liquidity events.

1. Ask yourself, was Phillips Edison’s self-tender in the best interest of investors? Take a look at the brief recap below.

In early 2021, PECO did a self-tender for $77 million of shares at a price of $5.75 per share (this was equivalent to $17.25 after its IPO and a 3-for-1 reverse stock split). PECO listed on July 21, 2021, at $28 per share, which was $3.50 under its NAV at the time. Currently, PECO shares are trading at $34.50, roughly double what they were tendered for last year.  Sponsor led tenders are not always the right choice for investors, but this one seemed to be good for the sponsor.

2. Was Modiv right to rush its IPO?

The shares of Modiv were listed earlier in 2022 for $25 per share.  As with many IPOs, the shares traded wildly.  This could have been a result of a seeming lack of institutional support. Today, the listed REIT trades at $16, roughly 36% below its IPO price. I think that this is an illustration that shows that listing may not always be the best answer. Timing, institutional support, and heightened demand from shareholders to sell all need to be considered in these decisions.  Additionally, a full analysis of how the earnings compare with other REITs in its peer group and what the quality and diversification look like versus other comparables in the market.

3. Should Cion have initiated tranched liquidity events?

Recently, the company provided shareholders a liquidity opportunity by listing on the New York Stock Exchange, BUT the company didn’t offer retail investors access to pre-IPO liquidity.  Instead, they restricted current holders and unlocked the liquidity via three separately timed windows. In each instance when a liquidity window opened, the stock was pressured downward on high volumes.  Today, it is trading at a 50% discount to the IPO price.

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Going forward, other REITs and Business Development Companies (BDCs) have plans to list their shares in the public markets. Which means that, as a financial advisor, there are a couple questions worth asking:

What, if anything, are these firms doing to alleviate current selling pressure? Is it truly in shareholders’ best interest to list its shares? And, in another scenario, is it in shareholders’ best interest for a U.S.-domiciled company to list its shares on foreign stock exchanges?

The bottom line is this: There are other opportunities for shareholders to experience pre-IPO liquidity at fair prices by transacting on secondary market platforms. As an advisor, you owe it yourself and to your clients to explore those options.

Take care,

Brian King