CNSREIT-AR-2024 Final - Flipbook - Page 63
We may invest in real estate-related equity, which is subordinate to any indebtedness, but involves different rights.
We may invest from time to time in non-controlling preferred equity positions, common equity and other real estaterelated interests. Preferred equity investments generally rank junior to all existing and future indebtedness, including
commercial mezzanine and mortgage loans, but rank senior to the owners9 common equity. Preferred equity investments
typically pay a dividend rather than interest payments and often have the right for such dividends to accrue if there is
insufficient cash flow to pay currently. These interests are not secured by the underlying real estate, but upon the
occurrence of a default, the preferred equity provider typically has the right to effectuate a change of control with respect to
the ownership of the property.
There are various risks associated with investing in preferred securities. Preferred securities may include provisions
that permit the issuer, at its discretion, to defer or omit distributions for a stated period without any adverse consequences
to the issuer. In certain cases, deferring or omitting distributions may be mandatory. If we own a preferred security that is
deferring its distributions, we may be required to report income for tax purposes although we have not yet received such
income. In addition, during periods of declining interest rates, an issuer may be able to exercise an option to redeem its
issue at par earlier than scheduled. If this occurs, we may be forced to reinvest in lower yielding securities. An issuer may
redeem preferred securities if the issuer can refinance the preferred securities at a lower cost due to declining interest rates
or an improvement in the credit standing of the issuer, or in the event of regulatory changes affecting the capital treatment
of a security.
In addition, traditional preferred securities generally offer no voting rights with respect to the issuer unless preferred
dividends have been in arrears for a specified number of periods, at which time the preferred security holders may elect a
number of directors to the issuer9s board of directors. Generally, once all the arrearages have been paid, the preferred
security holders no longer have voting rights. Hybrid-preferred security holders generally have no voting rights.
Common equity is subject to special risks. Although common equity has historically generated higher average returns
than fixed-income securities over the long-term, common equity also has experienced significantly more volatility in
returns. Common equity may be more susceptible to adverse changes in market value due to issuer-specific events or
general movements in the equity markets. A drop in the stock market may depress the price of common equity held by us.
Common equity prices fluctuate for many reasons, including changes to investors9 perceptions of the financial condition of
an issuer or the general condition of the relevant stock market or the occurrence of political or economic events affecting
issuers. For example, an adverse event, such as an unfavorable earnings report, may depress the value of common equity in
which we have invested; the price of common equity of an issuer may be particularly sensitive to general movements in the
stock market; or a drop in the stock market may depress the price of the common equity held by us. Also, common equity
of an issuer in our portfolio may decline in price if the issuer fails to make anticipated dividend payments because, among
other reasons, the issuer of the security experiences a decline in its financial condition. Common equity in which we invest
is typically subordinated to preferred securities, bonds and other debt instruments in a company9s capital structure in terms
of priority to corporate income and assets, and, therefore, will be subject to greater risk than the preferred securities or debt
instruments of such issuers. In addition, common equity prices may be sensitive to rising interest rates as the costs of
capital rise and borrowing costs increase.
In addition, equity investments, particularly preferred securities, may be illiquid or have limited liquidity due to lockout periods, limited trading volume or other limitations or prohibitions against their transfer, sale, pledge or disposition,
including any necessary registration with the SEC requiring coordination with the issuer for the sale of such securities. Our
investments in real estate-related equity securities will involve risks relating to the particular issuer of the equity securities,
including the financial condition and business outlook of the issuer. Issuers of real estate-related equity securities are
subject to their own operating and other expenses and may be subject to a management fee or performance-based
compensation (e.g., promote), which we as equity holders will indirectly bear. Issuers of real estate-related common equity
securities generally invest in real estate or real estate-related assets and are subject to the inherent risks associated with real
estate.
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