Wells REIT II - Channeling Joe Biden
To paraphrase the vice president, it's a big freaking deal. Wells REIT II made two filings today, one not unexpected and another that just jumped off the page. Wells REIT II announced that it was cutting its dividend from 6% to 5%. The REIT had been telegraphing this for sometime, disclosing in at least its last two 10-Qs that its distribution was not fully covered by operational cash flow and the board was monitoring whether the REIT could maintain the dividend. Wells REIT II follows the trend of non-traded REITs - Hines REIT, Inland American to name two - that dropped distributions after closing their offering period. While the drop in distribution is unfortunate, it was not unexpected, and appears prudent.
Wells REIT II also announced a huge acquisition. The REIT is paying $615 million for Market Square, a 679,710 square foot, Class A office complex in Washington DC. This equates to $905 per square foot. This monster transaction should represent at least 10% of Wells REIT II's portfolio. I am not sure whether it's comparable, but another downtown DC office property recently sold for $596 per square foot. If the sale is comparable, REIT II did not get the property on the cheap. Wells REIT II's purchase of Market Square is not going to tamper the opinion that Washington DC is the hottest commercial real estate market in the country. It was a big freaking deal.
5 comments:
This looks like another in a long line of blockbuster Wells transactions: very high profile property in an excellent location in a hot market. Unfortunately, Wells track record with such properties is unremarkable. That the sale price is nearly double the per square price of the most recent comparable suggests, that Market Square has a good chance of repeating the experience.
Note, too, that the entire acquisition price is financed with debt. Adding the acquisition and debt to the balance sheet as of September 30, 2010, yields assets of $6 billion and $2.3 billion of total liabilities. A debt ratio of 38% is at the high end for a Wells fund, and an acquisition fully financed with debt is highly unusual.
Globest.com reports that this transaction is at around a 4.5% cap rate, which may tie into the dividend cut.
crereview estimates a 4.2% cap rate. Either way, the property's cap rate wouldn't cut into the distribution yet. If the cap rate is this low I am not sure how it is accretive to the 5% yield, especially when adjusted for offering fees.
It wouldn't affect the dividend yet, but the Board would know that the purchase will be a drag going forward, and therefore reduce proactively.
It seems that the transaction is being financed primarily from a line of credit. I'll have to look at what the interest rate is on that credit line, and I imagine it is a floating rate which could backfire down the road if rates shoot up.
Wells REIT II's 10-Qs have been clearly stating that the REIT was weighing a rate cut, so I don't think this acquisition weighed in the decision. I don't know the specifics of the financing, but I don't think the line of credit debt will be in place for an extended period. Wells has always been debt averse, so I would imagine that permanent debt is being arranged. The quality of the property should allow for attractive debt terms, hopefully will offset the low cap rate.
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