Reprieve - Maybe...
Wells Timberland REIT's first principal payment on its $160 mezzanine loan through Wachovia Bank was due yesterday. The REIT filed an 8-K yesterday detailing an amendment to the mezzanine loan. (The mezzanine loan is part of the REIT's financing of its first acquisition, a $400 million purchase of timberland in Georgia and Alabama.) The $40 million payment that was originally due yesterday was the first of three payments that were due over the course of 2008. The second payment of $24 million was due by the end of April and the remaining balance was due October 17, 2008. The REIT couldn't make its first payment and has negotiated an extension and amendment to the terms of the loan. The first $40 million payment is now due on June 30, 2008, the second payment is now $30 million and due August 29, 2008. If the outstanding principal is reduced to $60 million by October 17, 2008, the due date is extended to March 2, 2009.

These amendments have come with a price. The interest rate has been increased to 11% from the previous 9%. The 8-K further states that Wells Real Estate Funds, Inc. has agreed to make a substantial principal payment on a separate outstanding loan issued by Wachovia to Well Real Estate Funds, pay additional fees to Wachovia in connection with such loan and increase the collateral supporting its guaranty of the REIT's mezzanine loan. I guess there was a reason Leo Wells eschewed debt for so many years.

It is good that Wells negotiated the extension. It's anyone's guess whether the extension can save the REIT. Capital raised through the REIT's offering is the source for principal repayments on the mezzanine debt and the REIT's offering has obviously not met expectations and debt service requirements. Its cost of borrowing has just increased, which will put further pressure on the money raising efforts. The REIT's capital raising efforts might be impacted if the renegotiation of the mezzanine loan gives the impression of financial problems for the REIT. I don't suspect many advisors will recommend an investment that has a hint of financial trouble.

The REIT's first acquisition was like a python trying to eat an elephant. (The REIT had raised less than $10 million when it announced the $400 million acquisition.) The python has the elephant in its mouth and the battle to digest or die could go either way.