WSJ on Dividend Capital's Total Realty TrustLast Wednesday's Wall Street Journal (July 7, 2010) had an article on Dividend Capital's Total Realty Trust's $1.3 million acquisition of thirty-two office and industrial properties from iStar Financial. The article's headline, "Sign of Recovery? Or Not? Successful Sale Had Help," gave the impression that there was something wrong with the deal. The author's idea of trouble with the transaction was that it included Class A properties with some lesser industrial properties and required substantial equity. If you acquire thirty-two properties, not all can be trophy properties. The lesser properties are industrial properties leased to the likes of Google and Fed Ex. The leverage was 64%, with the REIT throwing in $443 million (the math does not match perfectly for some reason). The author says that during the boom this deal would have qualified for 90% financing. That amount of leverage is unavailable in today's market so the point of reference is a red herring. The portfolio is 99% occupied, has an average lease term of over seven years and was acquired on an 8.1% cap rate. These figures appear positive for the REIT.
Here are a couple of points the article did not address that I think are worth mentioning. Total Realty Trust had $489 million of cash at March 31, 2010. The $443 million of equity utilized most of this cash. The acquisition had $105.6 million of mezzanine financing provided by iStar. How does Total Realty Trust plan to repay this mezzanine debt? It's not raising any more equity and will need to either refinance assets or sell assets. I don't see it being able to refinance legacy assets and receive any extra cash to apply to the mezzanine loan.
In the first quarter Total Realty Trust paid out $27,609,000 in distributions, but it only had $15,552,000 of operating cash flow and $14,293,000 of Funds From Operations as defined by the REIT. How will this huge transaction make up this distribution shortfall? There is limited cash remaining to support distribution shortfalls so the new portfolio is going to have to generate significant cash flow.