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.


Anonymous said...

Wells authorized 15,000 shares of the class b preferred but only sold 10,700. This keeps their options open to tap this source of financing again. I'd rather pay 8.5% than 11% interest but using this source of financing should give potential common stockholders (including German ones) pause. Does this ploy threaten their ability to qualify as a REIT?

Rational Realist said...

yes, wells can buy $4.3 mill. more of Series B. This alone won't let it pay off the mezz debt. it does threaten its ability to qualify as a reit. i will explore this avenue further.