Investors who were sold the Watermark Lodging Trust REIT have suffered dramatic losses. Shares were originally sold to investors at $10 a share. In November 2020 the company declared its net asset value to be $5.51 per share for Class A shares. However, since November the limited sales on the secondary market have ranged from $3 per share to less than $4 per share, suggesting investors could have suffered losses of 60% or even 70% from their investment in the Watermark REIT. However, options to actually sell or liquidate the Watermark Lodging Trust REIT may be extremely limited.
When investors purchased this REIT, it may have been under a different name. In October 2019, the Carey Watermark Investors 1 Incorporated (CWI 1 / CWI I) and Carey Watermark Investors 2 Incorporated (CWI 2 / CWI II) announced a proposed merger. The merger was completed in 2020, and the two Carey Watermark REITs (CWI 1 and CWI 2) became Watermark Lodging Trust (for each of reference this article will refer to the Watermark REIT generally).
The Watermark Lodging Trust REIT was a high risk investment. The REIT charged high upfront fees and commissions, for instance CWI 2 charged 10% or more in selling commissions, dealer manager fees, and other offering expenses, in additional to other fees and expenses. This ultimately resulted in less than approximately 87% of an investor’s investment actually being used for investments by the Fund. Thus, an investor who bought $100,000 of CWI 2 could be down over 10% immediately when factoring in commissions and fees paid to the broker/advisor and the dealer manager. In addition, the sponsor charged annual asset management fees, operating expenses, loan refinancing fees, and participated in “profits” which were 10% of distributions of available cash. The payment of the “profits” was not conditioned on prior return to stockholders of their invested capital. The lucrative upfront commissions may explain why many brokers sold this REIT to their customers.
The Watermark REIT was originally a blind pool offering. This meant that the fund had not had any net income and did not own any properties. Further, the fund had not even identified any properties to acquire with the offering proceeds, and it had not established financing sources. Thus, investors and advisors were unable to evaluate the investment portfolio prior to the initial investment. Further, the distributions were known to likely exceed the REITs earnings during the startup period, and thus some of the distributions were merely a return of the investors’ capital.
Non-traded REITs are known to be risky investments suitable only for a narrow band of investors. FINRA cautions investors to carefully consider the fact that these products are generally illiquid, frequently for time spans of at least eight years. It can be extremely difficult to valuate or sell a non-traded REIT, especially as these shares are not listed on a national securities exchange. Even when a sale does transpire, the high fees from the sale diminish the investor’s total return.
Advisors and brokers who improperly recommended the Watermark REIT or other similar investments to their clients may be held liable for the losses. These professionals are ethically bound to tell their clients about the risks associated with recommended investments. A broker also has an ethical obligation to consider an investor’s risk tolerance, age, investment experience, and net worth when determining whether a certain investment is suitable for the client. When a broker fails to fulfill these obligations, the firm that employs them may be held accountable for losses suffered by an investor to whom an unsuitable investment recommendation was made.
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