Sunday, August 31, 2008

Wells Timberland Class B Preferred Stock
On Friday, August 29, 2008, Wells Timberland REIT issued 10,700 shares, at $1,000 per share, of Class B preferred stock to Wells Real Estate Funds, Inc. This is a $10,700,000 cash contribution by Wells to Timberland. This presumably allowed Timberland to get its outstanding mezzanine loan down to the required $90 million. The Series B shares are on the same terms as the Class A preferred shares. Timberland issued 32,128 shares ($32,128,000) pf Class A preferred shares to Wells Real Estate Funds, Inc. in connection of Timberland's acquisition of its lone timber property in 2007.

The Series A and B preferred stock accrue interest at 8.5%, with the first interest payment not due until September 2010, and then payable each subsequent September. The first payment coincides with the maturity date of the senior loan. The preferred shares can be redeemed at any time along with any accrued interest. It is unlikely that any redemption would occur before the repayment or refinancing of Timberland's senior mortgage on its property that had an outstanding balance of $209 million earlier in August.

The 8-K does not state this, but the proceeds of the preferred stock had to be used to get the outstanding amount on the mezzanine loan down to $90 million. It is important to note that the mezzanine loan needs to get down to $60 million by mid-October or the entire balance is due. Based on its capital raising track record, Timberland appears unlikely to raise $30 million (plus offering costs) in six weeks, so it's going to need additional capital. As part of the issuance of the preferred stock, Timberland amended its charter to limit Wells' ownership in Timberland to 45%. The 8-K does not state Wells' current ownership amount, but Timberland has raised approximately $100 million and has issued $42.8 million in preferred stock to Wells. Based on these amounts, the use of Wells for further contributions appears unlikely.

I find the additional preferred shares puzzling. This is essentially more debt on an already highly leveraged acquisition. Wells has just committed its capital for at least two years. Timberland was expecting a large cash infusion from a new German Fund that will co-invest with Timberland. I wonder how the new preferred shares will play in Germany, because as I understand the German Fund, while a separate offering, it is investing on the same terms as Timberland's common shareholders, so it too now has more senior securities (although not directly). If the mezzanine debt is not down to $60 million by mid-October, Timberland has to come up with $90 million (as of Friday), which it doesn't have. I can only speculate about Timberland's scenarios at that point if capital is short.

Timberland must be in talks with Wachovia, the lender on the mezzanine and senior debt. The preferred shares investment, to me, indicates that the negotiations are not proceeding smoothly. I have to guess that some other form of financing is in the works. Wells is smart, and I do not see it dropping $10.7 million down a hole, (which is what will happen if Timberland does not get that mezzanine debt retired and it loses its lone property), unless it is confident it can get the mezzanine debt retired.

Timberland is still twisting in the wind until it can get that mezzanine debt retired and the preferred stock is just another stay of execution, while effectively adding to its debt load. If the German Fund does not come through with sizable capital in a short period, Timberland's options narrow.

Friday, August 29, 2008

Wells Timberland REIT just filed an 8-K. It does not look like the German capital has arrived. Timberland issued $10.7 million in Series B preferred stock to Wells Real Estate. I will summarize and comment on the 8-K over the weekend. You can access the 8-K on the SEC's website.

Tuesday, August 26, 2008

Housing Market and the GSEs
The most recent Case-Shiller housing data is out today with some mixed messages. The bad news is that home prices in twenty markets dropped 15.9% from a year earlier, and the second quarter's 15.4% decline was worse than the first quarter's 14.2% drop. The good news is that declines in later months in the quarter have slowed and inventory declined, which indicate that housing declines may be easing. Nine of the twenty regions showed positive returns. The areas that continue to look bad are Miami, Phoenix and Las Vegas.

The article in the Wall Street Journal (linked to above) says that one issue holding back housing is uncertainty around Freddie Mac and Fannie Mae, the two Government Sponsored Entities (GSEs) that buy the vast majority of mortgages. The market's reluctance about the two companies has caused their cost of capital to increase that has kept mortgage rates high, as overall interest rates have declined in recent months. Until the GSEs' financial situation is resloved mortgage rates are going to stay high and the housing market is going to muddle along. I suspect that a .50% decline in mortage rates would give the housing market a boost, maybe more so than the recent housing bill that was passed. Solid GSEs, acquiring mortgages, would also allow banks to resume lending.

Saturday, August 23, 2008

Housing Bust
Here is a good article summarizing the housing bust. The housing downturn is going to be longer than anticipated. It is worth reading the entire article. It is funny how no one, still, takes responsibility. Lenders were lemmings and relaxed their standards, borrowers thought home values could only increase and did not worry about payments, and builders did not pay attention to economics or demographics (or speculators buying homes). Here are a couple of standout points from the article:
“Owning a home is the American dream,” says Jamie Schrole, a Merced real estate agent. “Everybody was just trying to live out their dream.” The belief that this dream could be achieved with no risk, no worry and no money down was at the center of the American romance with real estate in the early years of this decade, and not just in Merced.

As Merced goes, so might go much of the nation. With as many as 2.5 million homes in the United States entering foreclosure this year and, at best, sales of only five million existing houses, the foreclosure price is becoming the rule in many areas. In Los Angeles County, whose 10 million people make it the most populous county in the United States, a third of the sales are foreclosures.

Ouch. Here is one final point that epitomizes the easy finance that lead to the current days of reckoning:

Mr. Seivert is going after a house that the owners bought 13 years ago for $86,000 and refinanced six times, taking advantage of rising values to get cash that, in part, they spent on the house. It has a pool with a small waterfall, a TV room in the converted garage, a deluxe outdoor barbecue setup and a kitchen with all the latest gadgets. The owners, who owe $350,000, can no longer make their mortgage payments. Mr. Seivert is negotiating to buy the house for $170,000 and then rent it back to the couple, who have jobs in the area. (Bold added.)

Where is the incentive to keep a house out of foreclosure when all the equity is gone? Hopefully, the people getting deals on foreclosed homes will have some equity in the homes they buy, and a stabilized housing market will help preserve this equity. This will end the housing crisis.

Thursday, August 21, 2008

Big Week For Timberland
Next week is a big week for Wells Timberland. It needs to have its mezzanine debt down to $90 million by August 29th, and it may have its first capital infusion from its new German fund a day or two before. I don't think it will have the capital to reach the $90 million without the German infusion. If the German capital comes up short - I am guessing Timberland needs $10 million to $20 million - Timberland's discussion with Wachovia should be interesting.

Monday, August 18, 2008

Not Going to End Well - Part II
(or, AIG Alum Joins WP Carey)
I was alerted to this news late last week, and got this from Investment Advisor's website:
Mark Goldberg, the veteran independent broker/dealer executive who most recently ran AIG’s Royal Alliance B/D, has landed at W.P. Carey as president of Carey Financial, the real estate company’s broker/dealer subsidiary. In his new position, Goldberg will be responsible for sales and marketing to B/Ds of the firm’s series of non-traded REITs called Corporate Property Associates.
I don't see the fit, and will leave it at that.

Thursday, August 07, 2008

AIG Bucks The Trend
Most other financial firms posted better than expected quarterly results that has lead to a rise in stock prices over the past few weeks. Not AIG. It posted a $5.4 billion loss after yesterday's market close, which lead to today's 220-point market decline. AIG's stock dropped 18% and the ratings agencies are looking to cut its credit rating. AIG's new CEO is feeling the heat for not addressing AIG's problems fast enough and dumping assets.