Thursday, September 20, 2018

Disappearing Sponsors

Last summer I watched And Then There Were None, a televised version of Agatha Christie's famous novel of the same name, where guests on a weekend stay at a desolate island mansion end up murdered, one by one.  Yesterday's news that Steadfast is exiting the non-traded REIT and credit business adds to the list of sponsors that are pulling their offerings.  I feel like I am watching a non-murderous version of And Then There Were None. 

Last year Steadfast tried to rebrand as Sitra Capital Markets, but the made-up name did not resonate and Steadfast made the decision to shuttered its Apartment REIT III and its Sitra Alcentra Global Credit Fund.  The REIT raised $197 million over two-and-a-half years and the credit fund raised just $36 million in about fifteen months. 

CNL is not stopping syndication, but did announce last week that it was not extending the offering for Healthcare Properties II, which only raised about $45 million since its inception in March 2016.  Like CNL, Griffin Capital is not stopping syndication but announced in mid-August the close of its Essential REIT II offering.  According to filings, the REIT has formed a special committee to review a potential strategic alternative.  Essential Asset II started its latest offering in September 2017, but only raised $7.3 million in 2018. 

Sponsors continue to suspend their offerings and/or exit the syndication business one-by-one.  Based on industry sales, there are so many candidates that I don't even want to start to guess what sponsor will be the next to yank its slow selling program. 

Tuesday, September 18, 2018

Ten Years On

I just re-read a bunch of my posts from 2008 as the financial world collapsed.  I sure posted a lot in 2008, several posts a day.  I noted Lehman's collapse, now seen as the pivotal point in the financial crisis, with a "WOW!" But it was just one of two big deals that September weekend, and it happened alongside with the implosion and Government bailout of AIG, action which was spurred by the market's negative reaction to the non-bailout of Lehman. 

I don't want to relive that trauma.  I remember turning on Bloomberg TV late at night that fall, after everyone in house had gone to bed, and watching the Asian markets to see what dread Europe and the US could expect the following day.  Not that my fears and news addiction would have any impact, but I had to know. 

It is hard to see inflection points as significant as they happen, especially if they occur amidst other events that appear major.  But Lehman's demise was different.  It showed that the Fed and Government had to step in to save the financial system from a complete collapse, especially as much larger firms than Lehman teetered towards financial ruin.

What scares me today is that I know the lessons of 2008 have not been learned, or if learned are not being heeded.  The housing market is inflated in many parts of the country, lending standards are down, and regulations enacted after 2008 to protect the financial system have been relaxed or eliminated.   It is important to note, too, that some areas devastated in 2008, like Southern California's Victor Valley, have been slow to recover, even after ten years. These communities need a stable banking system to continue their recovery. 

I am also frightened to think that any future financial crisis will be met with much stiffer resistance to Government bailouts of banks. This thinking is wrong because letting banks fail is going to wipe out retirement accounts and the housing market, including million's of peoples' equity in their homes.  Argue your political ideas on Twitter, not with the equity I have built over many years with a conservative mortgage. 

Wednesday, August 22, 2018

Colony and RXR: Make Investors Whole

Dear Colony and RXR,

Your non-traded REIT, NorthStar/RXR New York Metro Income, Inc., at around $38 million in investor capital, is just a speck in both your commercial real estate investment empires.  It is unfortunate that this REIT did not catch on with financial advisors, especially given the quality of the RXR management team and its long-term successful track record.  It's an ugly reality that sometimes financial advisors and their clients find investment funds that pay unsustainable 8% distributions and acquire dubious assets preferable to lower initial distributions and the potential for real long-term value appreciation.

As you know, New York Metro Income has two investments and a net asset value of $8.49 per share.  I read your filing yesterday, August 21, 2018, about your plan to liquidate the REIT's assets through a series of asset sales and internal transactions, and your generous offer to forfeit your shares to increase distributable cash to investors.  I did not, however, after reading the filing several times, note any mention of an intent to return investor capital in full.  I figure, based on a $10.00 per share offer price and the $8.49 NAV per share, that Colony and RXR would need to contribute $5.7 million, or about $2.9 million each to fully return investor capital.  I know that $3 million is not nothing, but it is a small amount to pay for firms of your size, and the goodwill you'd accrue with investors, financial advisors, and the broker dealers that invested with you would be far greater than $3 million.


Rational Realist

Tuesday, August 07, 2018

Bad Lenders

This Bruce Kelly article in InvestmentNews on two failed lenders raises some important issues.  The lenders are being investigated for loan fraud. I am not sure if the fraud is from the securities the two lenders sold to investors or the loans they made to small businesses.  For investors that likely lost their entire investment, it does not really matter.  One red-light-flashing issue to me is proper return for appropriate risk. Any investment that is paying 10% for a less than one-year hold period is risky; probably much riskier than the 10% potential return.  Assuming there is no fraud involved, I wonder how many investors would sign up if they were told that there is a better than 50% chance they could lose all their money to get 10%?  Not many. 

The second issue, and again assuming no fraud, is that lending and credit analysis is hard.  It is hard even for the biggest banks, which work in a strict regulatory environment with its own lending guidelines, and which have spent decades honing their credit analysis.  These banks are still far from perfect and they are considered the best.  Big private equity firms and their debt-focused divisions or competitors*, while outside of much of the regulatory environment facing banks, have established their own credit criteria and safeguards, but again these big non-bank money lenders are far from perfect.  Then you get down to firms like the fraudsters in the InvestmentNews article.  I can't imagine these outfits having credit expertise and procedures that approach even the smallest community bank.  Investors had no chance.

*Non-bank banks continue to grow and are an important part of the credit industry.  According to a recent Baron's article, private debt fund managers raised $107 billion in 2017. 

Thursday, July 19, 2018

No High Flyer

American Finance Trust Inc.'s stock price has disappointed on its first trading day.  I am not sure what prices I was expecting this morning, but with an original $25.00 offer price to shareholders, a Net Asset Value of $23.56, and only half the stock available for initial liquidity, I was hoping for a higher price than the approximate $15.00 per share the stock seems to have found.  While disappointed, I am not surprised.  At $15.00 per share, AFIN is yielding 7.3% to new buyers.

Tuesday, June 12, 2018

Good People, Good Times

Here is a wild story from the New York Post.  It details the elevator butt-kicking former United Realty executive Jacob Frydman received from his ex-business partner Eli Verschleiser.  I bet investors in United Realty (now First Capital Real Estate Trust) would have liked to have had a few whacks in that thumping.  The following is from the article:
Once inside, “Verschleiser struck Frydman with his fists about the head, abdomen and legs,” the suit claims.
Then he “scratched Frydman’s face and pulled out portions of Frydman’s hair,” according to court papers.
Frydman attempted to hit the emergency button while screaming for help, but Verschleiser towered over him, pressing the upper-floor button and then stomping on the older man’s chest, the suit says.
“If you do not immediately end the lawsuits against me, I will put an end to you,” Verschleiser allegedly warned.
This is an ugly story, but the lie in the first sentence taints the whole article.  It states that Frydman is the "head of a $2 billion Manhattan real estate company."  Please.  This knuckle head and his assailant formed United Realty, could not raise any real money, had the REIT buy garbage real estate (some of which from Frydman and none of which was in Manhattan), then sold the REIT's advisor for $25 million to someone dumber than Frydman.

The following property descriptions are from United Realty's June 30, 2015, 10-Q, the last financial statement that either United Realty or the renamed First Capital Real Estate Trust filed:
As of June 30, 2015, we owned a 69.2% interest in a joint venture that owns a residential property located at 2520 Tilden Avenue in Brooklyn, New York, or Tilden Hall, a 14.6% interest in a joint venture that owns a residential property known as 14 Highland Ave., Yonkers, New York, or 14 Highland, a medical building located at 945 82 nd Parkway, Myrtle Beach, SC, or Parkway, an office building located at 7 Carnegie Plaza, Cherry Hill, NJ, or 7 Carnegie, an undeveloped land parcel on Route 9, Ulster County, NY, or Route 9W, and a 7.26% interest in a joint venture that owns a commercial building located at 402-404 Lippincott Drive, Marlton, NJ, or the Lippincott Property. In addition, as of June 30, 2015, we owned a 76.7% interest in a joint venture that owns a mortgage note secured by properties located at 58 and 70 Parker Avenue, in Poughkeepsie, NY, or Parker.
Google map some of these gems and tell me Frydman is a $2 billion dollar man.

Wednesday, May 16, 2018

WSJ, ADISA, and Woodbridge

I received an email from the trade group ADISA this morning that was mostly a reprint of its letter to the Wall Street Journal. The letter responds to the WSJ's May 7, 2018, article on the risks posed by private placements, with a particular focus on bad securities brokers.  The article used Woodbridge Group of Companies and the brokers that sold it as its examples.  The reporting is detailed, with its prime implication being that brokers that sell private placements are likely to have regulatory issues.  The ADISA letter states brokers that sell private placements are not bad.  The truth is likely somewhere in the middle.  

I wrote about Woodbridge last December, and included points that should serve as warnings to investors and brokers that are considering investing in or offering private placements.  I won't repeat them all, but in short, if an investment sounds too good - offering 8% one-year returns (Woodbridge debt investment example cited in the article) in a 1% investment environment - it is too good; or you are taking on so much risk the return should be at least double.  Think another way: why is a sponsor is willing to pay investors 8% when it should be able to borrow cheaper? Is that smart?  Maybe, but probably not. The answer is that the sponsor likely can't get a loan or other cheaper forms of capital, which is why it is offering such high interest rates.  And if the sponsor can't get cheaper financing, maybe the rate it is offering private placement investors is too low.  If a bank won't lend to a sponsor, neither should you. 

The WSJ article stated as fact that there were $710 billion in broker-sold private placements in 2017.  This is just staggering.  The private placements I see in the broker dealer world could not have totaled more than $10 billion in 2017, and that includes DST exchange products.  What are the other $700 billion in private, broker-sold investments?  Unfortunately, the biggest selling sponsor in the apparent tiny private placement world I see is one that offers products that pay investors an unsupported 8% distribution.

In today's or any day's investment environment there is no low risk way to earn 8% income from an investment.  This is true no matter what a broker says or a fancy brochure states.