Monday, March 05, 2018

The Optomistic View

Colony NorthStar Credit Real Estate (CLNC) has traded over $20 per share for the better part of a week.  CLNC began trading in early February and is a new credit REIT comprised of assets from Colony NorthStar (CLNS) and two former non-traded REITs, NorthStar Real Estate Income Trust (NorthStar I) and NorthStar Real Estate Income II (NorthStar II). CLNC declared its first distribution this week, and the yields to NorthStar I and NorthStar II investors, based on an original $10.00 per share investment in the two REITs, are 6.6% and 6.1%, respectively.  This compares to the pre-merger yields of 7.0% that each REIT was paying.  (NorthStar I investors have a small amount of assets that were not part of the merger that may also pay a distribution at some point.)

Per-merger, Both NorthStar I and NorthStar II were paying more in distributions than they were generating in operating cash flow, a financial position that is unsustainable over the long run.  While CLNC's current stock price represents a discount-to-original-purchase-price of approximately 22% for NorthStar I investors and 28% for NorthStar II investors, the lower adjusted distribution is at a smaller discount than the stock price discount.  In my opinion, that investors are able to receive yields above 6% is positive news considering the previous distribution over payment.

Monday, February 12, 2018

Double Douchery

This blog is not morphing into a Walton-only rant, I promise, but I will comment on an email that Walton sent to investors last week.  The email announced that one of Walton's land funds is making a distribution on a partial property sale.  The fund sold just under half the acreage on one of its property's and is returning about $1 per share on an original $10 per share investment in the fund.  The property is being sold to an affiliate, which is a conflict of interest.  There is no mention of the property's original cost, so you can't put the sales proceeds into any context.  There is not enough information in the email to determine whether the sale covers the cost and fees related to the property.  Investors and their financial advisors need to press Walton to provide more information on the sale. 

Tuesday, February 06, 2018

More Douchery

From the table in yesterday's post, there is another example to support Walton's claim to King of the Douchebags.  In the table, Walton lists a 3% acquisition fee.  This 3% is calculated on the gross proceeds, not the actual price of the property.  The acquisition fee to Walton on the price of the property is 6.4%.  That is an outrageous fee.  I can't think of another sponsor that charges an acquisition fee on gross proceeds, nor one that charges an acquisition fee as high. 

Monday, February 05, 2018

The Douchebag Kings

Walton International is fiscally and morally bankrupt.  As a coronation to its title as King of the Douchebags, Walton sent a letter to investors late Friday afternoon announcing new values for its land funds.  It had previously used the purchase price paid by investors as the value of their investment.  This year it has decided to use the value of the raw land, plus some reserves to determine the values of its shares.  In the example below, the investment is worth $.684 per each $1 invested, or 68% of what investors put in the fund.  The change in reporting methods resulted in some hefty valuation discounts for investors.  The following is a use of proceeds table from on of Walton's land funds:

The Walton letter to investors states that, "For various reasons, Walton determined that using the net asset approach was not appropriate at the time of the final closing, but had this method been utilized the value reported at that time would have been significantly less than the original price of the Units purchased."  Various reasons?  Really?  How disingenuous.  There is only one reason for Walton's decision not to use the asset value method.  If Walton had explained to investors that only $.46 of each $1 was going to buy assets, while the rest of their investment went to initial fees or reserves for future fees, investors would have screamed.

As shown in the table above, less than half of gross investment proceeds were used to buy the actual investment property.  This means the underlying property needs to more than double in value just to return original investment.  Think about it, each land investment needs to more than double in value just to break even.  

Walton is using the proceeds spent on acquisition costs, and reserve items, including reserved future Management Fees, to determine asset value.  Most of the reserve items will be paid to Walton or its affiliates.  These fees are 21.7% of the capital raised, and don't include acquisition fees paid to Walton and other Operating expenses, many of which are also paid to Walton.  The Management Fee is reserved years in advance in order to sustain a steady flow of fee payments to Walton over a multiple-year hold period.  

I see no reason why reserved Management Fees should be included in the value calculation.  Walton will keep all these fees.  On the few parcels of land Walton has sold it has retained any un-paid management fees, even though they are reserved, as shown above, on a pro rata basis per property.  I have no idea what fees fall under Issuer Expenses, but Walton is the issuer, so you can guess who gets these fees.  Concept Planning expenses are the fees and expenses to develop the properties, including drafting site plans and obtaining entitlements, tasks that should add value to the properties.  Alas, the funds are paying Walton to perform these Concept Planning services. 

Walton's weasel letter to investors, several years into the investments' lives, is an unnecessary jolt.  It was never proper to present these shares at the price paid by investors, but the letter to investors reads as though Walton recently discovered the value information.  The letter, in my opinion, implies that Walton's auditors are to blame for the disclosure of this unfortunate information to investors.  Hey Walton:  entitle and sell the properties as timely as possible, return investor capital including unpaid management fees, and end your reign as King of the Douchebags.