BDC Scrutiny

InvestmentNews had an article yesterday on regulatory interest in Business Development Companies (BDCs).  This is not a shock giving the amount money flowing into this sector, especially to Franklin Square's BDC.  People need to remember that BDCs are high yield investments with non-credit borrowers.  Non-credit doesn't mean bad credits.  BDCs should be viewed like junk bond funds, not some newly discovered income-generating nirvana. 

Name Change and an Objective Change

CNL Properties Trust today announced that it not only changed its name, but its investment objectives, too.  It is now CNL Healthcare Trust, and will focus on:

The real estate investment offering intends to build a portfolio containing senior housing facilities and a range of healthcare properties, potentially including assisted living and memory care facilities, medical office buildings and continuing care retirement communities as well as it may also acquire other income-producing assets.

The REIT previously was targeting lifestyle and lodging assets, in addition to senior housing.  The REIT specified its first property acquisitions in late December 2011, a portfolio of five senior housing properties, but this transaction has not yet closed.

CNL Healthcare Trust directly enters the competitive healthcare non-traded REIT market, and will compete for assets with American Realty Capital Healthcare Trust and Griffin-American Healthcare REIT II.  Other non-traded REITs seem to keep buying healthcare assets, too, even though healthcare is not their primary target asset class.  In addition, Healthcare Trust of America is still a presence in the market place.

Name Change

American Realty Capital II, LLC, the sponsor of nine non-traded REITs, has changed its name to AR Capital, LLC.  Here is yesterday's press release I saw on my Google News feed.  I like the new name better.  I have always been confused about the "II," and wondered what ever happened to the "I."

Natural Gas Reverse Stock Split

Here is an interesting post on the Financial Times Alphaville blog, on natural gas ETF, United States Natural Gas Fund (UNG).  Because of the low price of natural gas, the EFT is going to have a four-for-one stock split to boost the price of the EFT.  

Atlanta Foreclosure

Here is a good article from Bloomberg on the foreclosure of the Bank of America Tower in Atlanta.  It is the tallest building in the South, and while completely trivial, the tallest building to face foreclosure since the credit market collapsed in 2008.  The article is full of good facts, not only about Atlanta, but also about CMBS.  I didn't know the information in this paragraph:

It’s (Atlanta) now squarely in the bust category with the highest rate of late payments for loans on offices bundled into bonds among the largest U.S. metropolitan areas, at 25.3 percent, according to data compiled by Bloomberg. That’s increased from 10.4 percent a year ago and is more than triple the 7 percent national rate. The rate for payments 60 days late or more was higher than Cleveland at 23.4 percent and Phoenix at 23.3 percent, the data show.

The property was purchased in 2006 for $436 million, the $363 million loan matured in December, and the property was appraised last March at $202 million.  

Say What?

Here is an example of double-speak gobbledegook from an Inland Western 8-K/A filing:

In light of these results, the Company has determined to hold an advisory vote on named executive officer compensation every year until the next advisory vote on the frequency of future votes on named executive officer compensation.

Ok, that's a head-scratching, confusing jumble of words.  It is also meaningless.  The REIT is allowing shareholders an advisory vote on executive compensation.  Advisory votes are just that, advisory.  The votes are non-binding and don't impact any actual compensation.  Here's my advisory recommendation:  no named executive should get any salary increase until Inland Western's current $6.95 share price is increased and becomes equal to or greater than the price investors originally paid for their shares. 

TIMMMBER!!!

If fees fall in a forest, do they make a sound?  Yes.  It's a slow-building, rumbling sound that will echo for some time.  Wells Timberland REIT filed an 8-K on Tuesday, January 24th, where it quietly announced that its advisor, Wells Timberland Management Organization, LLC (Wells TIMO) had permanently "discharged" $25.1 million in accrued and unpaid management fees and expense reimbursements.  These fees and expenses had accrued due to lender restrictions that were part of the debt Timberland REIT utilized to acquire its timber assets.  These fees had been a drag on this REIT because the fees were in a priority position to investor capital.  At September 30, 2011, the REIT had $27.3 million Due to Affiliates, of which $24 million was advisor fees and reimbursements payable to Wells TIMO.

The fee forgiveness is positive for investors and the right decision by Wells.  The REIT will continue to pay fees to Wells TIMO, but lender restrictions have been lifted due to debt paydown, and future fees will be paid as incurred, and not accrue any more. 

(Forest picture from Google Images and the website ecoeternity.com and is no relation to Wells Timberland REIT.)

Commercial Mortgage Refinancing

Here is a must-read article on commercial mortgage refinancings from Bloomberg.  The article's premise is that mortgages in strong real estate markets, in particular Manhattan, are able to get refinanced, while properties in smaller markets get less lender consideration.   The article used a Vornado-owned Manhattan property's $430 mortgage as a refinance example.  One fact that doesn't make it in the article's introduction is that Vornado paid the mortgage down by $130 million, which of course made the refinance easier.  This level of mortgage paydown would have allowed a refinance in most markets.  The question is in how many markets are property owners going to be willing to add that much equity to refinance a property?  For markets that have not recovered and owner equity gone, I suspect most property owners will take their chances with special servicers rather than putting in additional equity.

The article makes reference to Linen & Things, which I mentioned yesterday (emphasis added):

That may not be enough to bail out the Baybrook Gateway Mall in Webster, Texas, 22 miles (35 kilometers) northwest of Houston. 

A $41 million mortgage on the shopping center, originated by Goldman Sachs Group Inc. in December 2006 and sold as part of a commercial-mortgage bond deal two months later, was handed over to a firm that handles troubled loans because the borrower couldn’t refinance debt that matured this month, according to Fitch Ratings. So-called special servicers determine whether to modify loan terms or foreclose on property owners struggling to make payments.

Baybrook, co-owned by Blackstone Group LP’s Brixmor Property Group Inc. and JP Morgan Chase & Co., is currently working with the special servicer to resolve the finances, Stacy Slater, a spokeswoman for Brixmor, said in a telephone call. The mall lost tenants, such as Linens ‘n Things Inc. which filed for bankruptcy in 2008, she said, declining to comment further.

The article references a property in KBS REIT I that defaulted on its mortgage on January 11th.  I have not yet seen a KBS REIT I filing on this (but I am not sure whether it has to make an 8-K filing).  Here is the paragraph from the article:

A $43.5 million mortgage on One Citizens Plaza, a 224,089 square-foot office building that houses the headquarters of Citizens Financial Group in Providence, Rhode Island, also ran into trouble this month before its Jan. 11 maturity date, according to Fitch. Though the building was 98 percent occupied as of September, the borrower didn’t repay the mortgage originated by Wachovia Corp. in 2006, Bloomberg data show.

“We are just beginning communications with the lender about this loan,” said David Snyder, chief financial officer of KBS Realty Advisors, a private-equity real estate investment company in Newport Beach, California that owns the property. “At this juncture we are unable to predict the outcome,” he said in an e-mail.

There is other good information in the article including noting that the market for CMBS has recovered to its levels of last July, which means new origination.

It's Good To Be King

I just saw this Bloomberg article about Blackstone receiving $6 billion in commitments (on its way to $10 billion) for its latest real estate fund, Blackstone Real Estate Partners VII, which will focus on distressed real estate.  The $6 billion is not far from the total amount that non-traded REIT sponsors raised in all of 2011.

Private Equity Explained

Here is an excellent article from The New Yorker explaining private equity - good and bad.  (If the link doesn't work, the author is James Surowiecki.)  There has been plenty of misinformation the past few weeks related to private equity.  The job creation issue is tackled here:

Given the weak job market, it makes sense that the attacks have focussed on layoffs. But the real problem with leveraged-buyout firms isn’t their impact on jobs, which studies suggest isn’t that substantial one way or the other. A 2008 study of companies bought by private-equity firms found that their job growth was only about one per cent slower than at similar, public companies; there was more job destruction but also more job creation. And, while private-equity firms are not great employers in terms of wage growth, there’s not much evidence that they’re significantly worse than the rest of corporate America, which has been treating workers more stingily for about three decades.

Here is an example of the "bad" private equity: 

In 2004, for instance, Wasserstein & Company bought the thriving mail-order fruit retailer Harry and David. The following year, Wasserstein and other investors took out more than a hundred million in dividends, paid for with borrowed money—covering their original investment plus a twenty-three per cent profit—and charged Harry and David millions in “management fees.” Last year, Harry and David defaulted on its debt and dumped its pension obligations. In other words, Wasserstein failed to improve the company’s performance, failed to meet its obligations to creditors, screwed its workers, and still made a profit. That’s not exactly how capitalism is supposed to work. 

The people who ran Harry and David into the ground have a defense: economic conditions changed in unforeseeable ways. But that’s precisely why loading firms with debt in order to reap short-term benefits is bad. It leaves companies unable to weather tough times, and allows private-equity firms to make money even if things go wrong.

As if this weren’t galling enough, taxpayers are left on the hook. Interest payments on all that debt are tax-deductible; when pensions are dumped, a federal agency called the Pension Benefit Guaranty Corporation picks up the tab;

 

Many landlords that had private equity tenants (Mervyn's, Linen & Things, Steve & Barry, etc.) were impacted by similar tactics and were left with empty space when the retailers could not survive an economic slowdown due to their leveraged capital structure.

Profile In Courage

Here's an article from InvestmentNews on Behringer Harvard.  This sentence stood out to me:

Meanwhile, other broker-dealers — including FSC Securities Corp., Royal Alliance Associates Inc. and SagePoint Financial Inc., which constitute the American International Group Inc.'s Advisor Group — stopped selling the Multifamily REIT last summer when its offering period ended, according to spokeswoman Linda Malamut.

Is stopping sales when a deal closes its offering period really stopping sales?  Hasn't the bird flown, or the cows left the barn, or the fat lady sung, or the lights been turned off because the party's over?  The answers, of course, are No and Yes.  AIG didn't stop sales and sold Behringer Harvard through the end of its offering. Period.

Behringer Harvard Multifamily's distribution overpayment was no secret.  Multifamily neatly presented this fact every quarter throughout its long offering period.  This was a better story two years ago when broker / dealers had an actual decision to make.

I think a better question is what are broker / dealers doing now about other non-traded REITs that are two and three years into their offering periods and not making any headway towards covering their distributions.  Like Multifamily, these REITs disclose quarterly their inability to adequately fund their distributions.