Monday, June 26, 2017

Sounds Legit

First Capital Investment Corporation's (FCIC) board of directors has named its chairman as interim chief financial officer, treasurer, and secretary, as filed in an 8-K on June 23, 2017.  His interim term ends when the business development company files its March 31, 2017, financial statement.  The interim tile may be permanent, given that FCIC's real estate investment trust sibling, First Capital Real Estate Trust (FCRET), has not filed a financial statement since said chairman it took over nearly two years ago.  What could go wrong given that FCIC's first investment was to an affiliate and that multiple FCRET subsidiaries are filing bankruptcy?

Monday, June 19, 2017

Griffin Pounces

That did not take long.  Late Thursday W. P. Carey announced it was exiting the distribution of non-traded investments, and today Griffin Capital announced that it has hired former W. P. Carey executive Mark Goldberg, who among other duties at W. P. Carey served as Chairman of Carey Financial and President of W. P. Carey Investment Management.  I guess Griffin Capital is not the "other" non-traded alternative investment sponsor rumored to follow W. P. Carey's example and quit the industry.

Separately, I always laugh at the sycophantic claptrap quotes in press releases.  Just once I would like to read: "We hired Mr. So-and-so because he is a ruthless SOB who will not only help us gain market share and crush our competitors, but he also will fire the slacking employees we did not have the courage to terminate."

Friday, June 16, 2017

W.P. Carey Quits Selling Non-Traded Products

W. P. Carey filed an 8-K and press release late yesterday afternoon announcing that it will no longer sell non-traded products.  The 8-K was short and to the point:
On June 15, 2017, the Board of Directors of W. P. Carey Inc. (the “Company”) approved a plan to exit all non-traded retail fundraising activities carried out by its wholly-owned broker-dealer subsidiary, Carey Financial LLC, effective June 30, 2017, in  keeping with the Company’s long-term strategy of focusing exclusively on net lease investing for its balance sheet. The Company anticipates that it will incur non-recurring charges to exit its fundraising activities of approximately $10.0 million, in aggregate, during the second and third quarters of 2017, consisting primarily of severance costs.
The news was unexpected, but when you think about the management turnover at W. P. Carey over the past year, culminating in the departure of Carey Financial's President Mark Goldberg earlier this month, the decision should have surprised no one.  W. P. Carey is a large listed REIT and carrying a syndication division that is raising limited capital puts pressure on earnings. 

W. P. Carey provides sponsors that remain in the non-traded space some clear lessons for moving forward:

1  Know your skill set.  W. P. Carey was known for its CPA net leased real estate investment trusts (REITs), not business development companies (BDCs) or hotel REITs.  Carey tried to move away from something it knew, believing its sales organization and substitute products were interchangeable, and that broker dealers would adapt to products based on Carey’s earned reputation with its CPA product.  W. P. Carey's net lease knowledge did not transfer to new product acceptance.

2.  Products matter.  W. P. Carey was late to offer a BDC and then came in with a lackluster sub-advisor and a structure that left W. P. Carey open to broker dealer objections.  (I liked the master / feeder structure.)   Its sub-advised hotel REIT was fine, but as a sector investment it was no replacement product for the core CPA product.   Sponsors need to stick with their knowledge and competency, not chase sectors or product fads. 

3.  Fees matter.  W. P. Carey products were always expensive, especially on the front end, which is a difficult position to maintain in market now focused and concerned with DOL and its low fee requirements.    Yesterday's decision tells me that W. P. Carey was unwilling to adjust its fee structures in a manner to compete with broker dealer requirements in a DOL dominated environment.

The most attractive new products have low upfront costs, and align and subordinate sponsor compensation with investor returns.  Investors need profitable sponsors, and meaningful and attainable incentives for sponsors are required as the industry moves forward.

One final note on W. P. Carey.  Exiting the new product distribution removes a big incentive for W. P. Carey to provide liquidity to its existing investments.  These investments are externally advised, which means they pay asset management fees to W. P Carey.  A liquidity event means those fees go away.  An earnings focused public company will want to extend the fee inflow.

Tuesday, June 06, 2017

Juggling Chainsaws

Sometimes I get opaque on this blog, and this is one of those times.  I have been reading through several health care REITs' 10-Qs and 10-Ks, and while I am not ready to sound an alarm, I do see an area of concern.  In particular, REITs holding skilled nursing facilities worry me.  Skilled nursing investments are the medical sector that can juice up a healthcare portfolio.  Like student housing is to a multifamily portfolio or mezzanine loans are to a mortgage portfolio, skilled nursing has the potential to add return to a healthcare portfolio.  Skilled nursing properites typically trade at cap rate of 10% or more, which is 200 to 400 basis points or more than other healthcare properties, so when I see REITs buying these properties I take notice.

Skilled nursing is heavily dependent on medicaid reimbursements, which is the lowest level of reimbursement and can represent 80% or more of patients in a skilled nursing facility.  The balance is from much higher paying medicare and private pay patients.  A well run skilled nursing facility needs administrators that can work with hospitals and families to keep the "quality ratio" of medicare and private pay patients high compared to medicaid patients.  Skilled nursing properties that are subject to net leases with operators offer a REIT some protection, putting the patient risk on the operator, not the REIT.  I am seeing skilled nursing facilities in healthcare REITs where the REIT or a subsidiary is the operator, which means the REIT is taking on the operating risk of the facility.  
Skilled nursing facilities trade at cap rates higher than other healthcare properties for a reason - and that reason is risk.  If things go well the extra 200 to 400 basis points is great, but a slip in the quality ratio and that return goes away.  Investing in skilled nursing is a tantalizing opportunity for REIT managers to overcome loads, support distributions, and generate total return.  I am watching to see whether some managers went too far into skilled nursing and bought assets they did not fully understand.

The Unraveling

First Capital keeps falling apart.   Here is an InvestmentNews article on the most recent round of layoffs at the wannbe product sponsor.  The employees no longer on the First Capital "journey" should be grateful.  I bet the First Capital journey won't appear on resumes.  Neither of First Capital's two public programs have filed financial statements, although the InvestmentNews article quotes First Capital's CEO Suneet Singal saying "We plan to have all filings current in short order."  Right.  The DI Wire reported a week ago that the third party firm that provided First Capital's BDC with a chief financial officer and chief compliance officer has terminated its contract with First Capital, leaving the BDC without a CFO or a COO.   This is quite the horror show, but I can't look away.

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Palace Intrigue

W.P. Carey's Carey Credit Income Fund 2016 T and Carey Credit Income Fund 2018 T filed 8-Ks late on Friday with the following news:
On May 30, 2017, Mr. Mark M. Goldberg informed W. P. Carey Inc. (“W. P. Carey”) of his intended resignation, effective as of July 10, 2017, from his positions with W. P. Carey, the ultimate parent of the investment adviser to Carey Credit Income Fund (the “Master Fund”) and his positions as President of the Master Fund, Carey Credit Income Fund 2016 T (the “Company”) and each of the other feeder funds, to pursue other interests.

Additionally, Mr. Goldberg has resigned as the Chief Executive Officer and President of the Master Fund's investment adviser Carey Credit Advisors, LLC (“CCA”). Mr. Jason E. Fox, President of W. P. Carey, has been named Chief Executive Officer and President of CCA.
Mark Goldberg has been around non-traded alternative investments since the 1980s on both the broker dealer and product sides.  I view his departure as big news, and it's probably not random.  Carey is coming up on two months with no commission-based non-traded products available to sell, and had to send money back to investors in its Carey Credit Income Fund 2016 T when the offering closed on April 28, 2017, a move anathema to a product sponsor.  Carey Credit Income Fund 2018 T, which was declared effective by the SEC in October 2018, had to refile its prospectus and is pending SEC re-approval before it can offer shares.  The refiling clarifies Carey Credit Income Funds' accounting method for the ongoing trail commission it must pay broker dealers on T shares.  (The ongoing trail commissions are future obligations and a liability that lowers net asset value, and one more reason T shares stink.)  I can't help but wonder whether Goldberg is the fall guy for Carey's product missteps.

Tuesday, May 09, 2017

Tough To Read

Here is a Bloomberg article on the decline of Sears.  It is a sad story for a company that was America's top retailer for nearly 100 years.  The article states that Sears' decline in the 1980s when it "made a real estate play instead of focusing on selling stuff."  I am not a fan of financiers owning retailers, but Sears' issues pre-date Eddie Lambert's acquisition of it in 2004, although he has played his part in Sears' downfall:
Since then, Sears and Kmart have been slowly dismantled by Lampert. Implementing a culture of warring tribes, one in which divisions would battle it out for resources, little cash was funneled back into reviving physical stores. Chunks of the business were sold to keep the lights on. In January, the company sold the famous tool brand Craftsman to Stanley Black & Decker Inc. for about $900 million. “He did nothing to maintain the stores—nothing to spiff them up and make them a nice place to go shopping,” said Robin Lewis, a longtime industry analyst and chief executive of the Robin Report.

Monday, May 08, 2017

Is A Financial Flu Contagious?

I received a long email from Walton International, the large land syndicator, describing its Canadian parent's restructuring.  I don't know Canadian bankruptcy terms, but it sounds like a Chapter 11 restructuring.  Walton offered many land deals in the United States, but its Canadian housing operations were always touted as the backbone of the organization.  Here is part of the email:
On April 28th, 2017 Walton International Group Inc. (“Walton Canada”), an entity organized in the province of Alberta Canada, and several other Canadian affiliates and Canadian development entities (collectively, the “Canadian Filing Entities”), announced that they have obtained an Initial Order from the Court of Queen’s Bench of Alberta (the “Canadian Court”) for creditor protection under the Companies’ Creditors Arrangement Act (“CCAA”). This filing in Canada (the “CCAA Proceeding”), allows Walton Canada to stabilize its affairs, with a goal of restructuring certain obligations and other attributes of the Canadian Filing Entities and Walton Canada emerging as quickly as possible as a more profitable operating company. The Canadian Filing Entities are wholly owned direct and indirect subsidiaries of Walton Global Investments, Ltd. (“Walton Global”), a parent company also organized in Alberta Canada, which is not a Canadian Filing Entity.

The relief requested by the Canadian Filing Entities was precipitated by the downturn in the Alberta economy. The primary driver of the poor economic situation in Alberta is the severe and sustained drop in energy prices that began in 2014. The resulting decrease in demand for Walton’s products in Canada and resulting liquidity and financial difficulties of certain development projects in Alberta has created this situation.
I have been trying to think of a situation where the financial problems of a sponsor have not impacted its funds, even though the funds are separate entities from the sponsor.  No example jumps to mind.  Walton goes to great lengths in its email to distinguish between its Canadian operations and entities and its American land funds, and this is correct.  One thing about Walton though, there was always lack of transparency on the other entities involved, besides the U.S. funds, on its U.S. land deals, so I would not be surprised to learn that U.S. investors own land near or adjacent to land owned by a Walton Canadian entity.

Walton has been sloooooow to sell its land deals, in large part, in my opinion, because the longer Walton owns the land the more of the up front reserved management fees it gets to keep (and believe me, Walton reserved years of fees).  With its Canadian financial problems, and a stack of prepaid, reserved fees in its U.S. land funds, do not look for Walton to start selling properties until its gets all those reserved fees.

Towards the end of the email Walton says, "While we know this information may cause concern, we ask for your patience in contacting Walton with further inquiries on the situation while we work through this restructuring."  Don't call us, we'll call you.  Comforting.

Monday, April 24, 2017

Yanking The Deal

I read in this morning's DI Wire that Resource Real Estate is suspending its Resource Innovation Office REIT, and will restructure it as a Net Asset Value REIT.  The REIT had raised less than $5 million in the nearly two years since it was declared effective, so I am guessing that tweaking the fee structure is not going to suddenly make this REIT attractive to broker dealers and investors.  Resource America, the parent of Resource Realty, was purchased by C-III Capital Partners, a large real estate investment firm, in deal that closed in early September of last year.  

I don't know C-III's plan for the Resource non-traded REITs, but I think broker dealers and investors would like to see an investment offering C-III's real estate expertise.  Trying to push legacy Resource deals in a tough environment is not working.  C-III has controlled Resource for eight months and its time put its institutional real estate expertise and its balance sheet to work attracting retail investors.