Monday, June 12, 2006

New Whipping Boy
I am updating my review of the Inland American Real Estate Investment Trust. The updated material does not change my original opinion of the program: that it is one to skip. The front-end load approaches 17% and the ongoing fees can hit an outrageous 7% of revenue if investors receive an achievable 5% distribution. Inland receives no acquisition fee if properties are purchased directly. It will receive a fee if a real estate operating company is purchased. The first transaction was another REIT, so Inland gets its acquisition fee. I am uncomfortable with investors paying 17% for Inland to have access to purchase REITs. The original portfolio, if I remember correctly, had marginal properties (thanks Google Earth) with limited lease growth.

I am not against marginal properties. I like properties that make investors money, and it does not matter whether the property is marginal or top-quality. There needs to be upside in lease growth and the acquisition price needs to be favorable (cap rates higher than market cap rates). The deal, in my opinion, fails on both accounts. There is limited lease growth and the cap rate was near 6%. Investors in Inland American should expect flat distributions. Capital appreciation is unknown, but with flat lease rates and cap rates near historic lows, I am not optimistic.

No comments: