Cornerstone Healthcare Plus REIT Pulls Offering, Hires Stanger
I love Friday afternoons.  I just saw this filing from Cornerstone Healthcare Plus REIT.  It has terminated its offering, and has hired Robert Stanger to assist it with its strategic alternatives.  One of the alternatives could include hiring a new managing broker / dealer, which would mean the REIT would reopen its offering at some future point.  Cornerstone Healthcare Plus began raising capital in August 2007 and has raised an anemic $130 million (approximately) in investor equity.   Here is the entire correspondence:

April 29, 2011

Dear Investor,

We are writing to inform you of a recent decision made by the Independent Directors Committee of the Board of Directors of Cornerstone Healthcare Plus REIT, Inc. (“CHP”). 

At the recommendation of our advisor, the Independent Directors Committee is considering various strategic alternatives for CHP to enhance stockholder value. One of the alternatives under consideration is the hiring of a new dealer manager for the company’s public offering of common stock.  The Independent Directors Committee has engaged Robert A. Stanger & Co. as its independent financial adviser to assist in the consideration of strategic alternatives.

In consideration of the uncertainty associated with these developments, our Independent Directors Committee has directed us to take the following steps with respect to our public offering.

The Public Offering.  Effective immediately, we are suspending our public offering.  Accordingly, we are not making or accepting offers to purchase shares of stock in CHP until further notice.

Suspension of the Distribution Reinvestment Plan.  Our offering included a distribution reinvestment plan under which our stockholders could elect to have all or a portion of their distributions reinvested in additional shares of our common stock.  Consistent with the above decision with respect to the offering, we are suspending our distribution reinvestment plan effective on May 10, 2011.  Therefore all distributions paid after that date will be in cash until further notice.

Suspension of the Stock Repurchase Program.  Our stock repurchase program provides stockholders with a limited ability to sell shares to us for cash until a secondary market develops for our shares.  Consistent with the decisions to suspend our public offering and distribution reinvestment plan, we are suspending repurchases under the program for reasons other than death effective May 29, 2011. We can make no assurances as to when or if repurchases will resume.  The share repurchase program may be amended, resumed, suspended again, or terminated at any time.

We believe that these steps will better position us to maximize stockholder returns over the long term.  We take your investment with us very seriously, and we look forward to continuing to serve you.

Sincerely,

Terry Roussel

President and CEO

The share repurchase programs are always the first casualties when REITs start exploring their "strategic alternatives."  Investors' limited liquidity options are now zero, except for trying to brave the secondary market.   Cornerstone Healtcare Plus has overpaid its distribution since inception, so now that the equity raise is over, I'll watch to see whether the current distribution level is maintained.

Thoughts On Behringer Harvard Multifamily's Recent Acquisitions
Over the past week Behringer Harvard Multifamily REIT I announced two investments.  The first is a 320-unit to-be-built apartment complex in Houston, TX.  The REIT will make a mezzanine loan investment in the development.   I am guessing the loan will accrue interest, which along with the principal, will convert to equity when the property's construction is complete and a permanent mortgage is obtained.

The second property is a 179-unit apartment complex, originally built in 2007 as condos, in downtown San Francisco.  The purchase price was $94 million, or $525,000 per unit.  Here is the 8-K filing.  Here is an article from a San Francisco real estate blog, Socketsite.   The comments are interesting, especially the one that says the cap rate was less than 4%, which is amazing if true. 

There was little financial detail provided in the two filings.  On the surface it appears the Houston investment will not generate meaningful cash flow in the immediate future, unless the mezzanine investment pays current interest rather than accrued interest.  The property's construction is slated for an early 2012 completion, and then it'll have a lease-up period that could take another twelve to eighteen months, so you looking at approximately two years before it is fully operational.  Absent financial data, the return on the San Francisco property is open for speculation. 

What is known is that at year-end 2010, Behringer Harvard Multifamily I's cash from operations and Funds From Operations (FFO) only comprised 5.5% and 15.9%, respectively, of its distributions, with the shortfall paid from offering proceeds.  The REIT closes its offering period at the end of July, meaning its largest source of distribution financing is ending.  While these two properites are only part of a now thirty-five property portfolio, I would have thought the REIT would show more urgency in its efforts to cover its distribution from property cash flow.

T Boone Pickens On Natural Gas Fracking
I heard most of this National Press Club panel interview with T Boone Pickens and Ted Turner while driving on Easter.   Pickens discusses the environmental issue surrounding natural gas fracking at around the 37:00 mark.

American Realty Capital Trust Modifies Its Share Grants
I just saw this press release announcing that American Realty Capital Trust has modified the compensation to its advisor by limiting the amount of shares it can grant to the advisor.  I will look at this in more detail, but on the surface this appears positive for investors.

Too Good To Be True?
I get plenty of junk emails, and I usually just delete them.  One caught my eye this morning.  Here is a partial reprint of the email, touting the product's highlights:

Product Features & Highlights:

 - Senior Secured Bonds for safety-
    these are NOT promissory notes !!

 - Interest rates:   6% for 1 year
                             7% for 2 years
                             9% for 3 years
                             12% for 5 years

 - Interest paid quarterly

 - BD Commission:  4.5% on 1 year bonds
                                       5.0% on 2 year bonds
                                       5.5% on 3 year bonds
                                       6.5% on 5 year bonds

Look, a CD equivalent!  6% for one year, and it pays a 4.5% commission that can probably be renewed every year.  Everybody's a winner!

Another Record
Last month this blog noted that Wells REIT II paid a near record price for a downtown Washington DC office property.  The Wall Street Journal reports that CB Richard Ellis REIT has paid a record price for a Jersey City property.  The REIT is paying $350 per square foot, and the return expectations are in the high 7% range, which, according to the Wall Street Journal article is a bargin compared to Manhattan real estate just across the Hudson River.  Here are some specifics from the article:

Hartz Mountain Industries Inc. this week sold twin 12-story office buildings in Jersey City’s Colgate Center in a deal that values them at about $310 million. That translates into a record $375 a square foot, according to Real Capital Analytics, a real-estate research firm.

The buyer, CB Richard Ellis Realty Trust, a nontraded REIT, is paying about $70 million and assuming $240 million in debt for the buildings at 70 and 90 Hudson St., which offer unobstructed views of Manhattan and are 100% leased.

Private Equity Real Estate
Bloomberg has a long, informative article on private equity real estate investment.  The article states that 439 private equity funds are looking for $160 billion in commitments.  That is a significant sum of capital.  The capital behind some of these private equity firms is staggering.  Firms like Blackstone have to make huge investments, like the $9.4 billion it paid to acquire Australia's Centro Properties' US mall portfolio earlier this year, and can't spend the time on individual properties.  The $9.4 billion in one transaction is more then four to six times what the typical non-traded REIT will raise in equity over two years.  (The article did not give specifics on the equity Blackstone used to acquire the Centro portfolio (I doubt it was $9.4 billion), but still, the comparative scale to non-traded REITs is impressive.)

New Tenant In Common Consolidation Venture
A new company, Ascent Realty Advisors, has been formed to help tenant in common investors and sponsors.  Here is an article from GlobeSt.com discussing the new venture.  The principals behind the new entity are from TIC Properties, a sponsor of tenant in common programs, and CapHarbor.  Ascent has formed a limited partnership, Ascent Commercial Property Limited Partnership, which will allow tenant in common investors (and presumably Delaware Statutory Trust (DST) investors as well) to exchange their interests for limited partnership units.  The exchange is called a 721 exchange and would allow TIC or DST investors to maintain their tax deferral while becoming part of a diversified portfolio.  The partnership will focus on office and industrial TIC and DST properties.  Ascent will likely form a public non-traded that will be affiliated with the partnership. 

Here is a quote from the GlobeSt article:

Ascent intends to allow for the roll-up of properties on a tax-deferred basis through section 721 of the IRS code. The company is also considering the formation of a publicly registered, non-traded REIT. The Ascent Fund, which will focus on office and industrial properties, will be managed by Ascent Commercial Property Management LLC, led by president Barry Gruebbel.

It is this blog's opinion that modifying the TIC or DST structure is going to be the only way many TIC or DST deals are going to be able to modify debt, short of selling the properites, and to get access to capital.   The above deal is the third that I have seen or heard about so far this year.   There are going to be more programs like this over the coming months.

More Fracking News
Here is an article from yesterday's New York Times.  It summarizes the finding of a Congressional investigation that was initiated last year when Democrats controlled the House.

Big Boy Pants
I have noticed over the past year or more that non-traded REITs are getting sophisticated in their financing, credit crisis notwithstanding.  Just last week it was announced that Wells REIT II raised $250 million in a bond offering (5.875% interest for seven years) and CNL Lifestyle REIT raised $400 million in a bond offering (7.25% interest for eight years).  The Wells REIT II bond offering is a rated bond, which is why its interest is lower than the rate on the CNL Lifestyle bond.  I am not aware of any non-traded REIT that had issued bonds before last week.

Last month this blog noted Health Care Trust of America's line of credit and its strict controls on distributions.  Other non-traded REITs are also obtaining lines of credits to facilitate acquiring properites and in some cases to help pay distributions.  (For without distributions, the REITs don't get equity flows, which means they won't be able to repay their lines of credit.  "We must borrow money to pay distributions, so we can raise money to repay the debt."  A classic Catch-22 if there ever was one!)

I understand that the lines of credit are being used to smooth cash flows and to facilitate acquisitions in advance of equity.  The Wells and CNL bond issues are a sign of maturity and may benefit these REITs in the long run by exposing them to the capital markets before their listings (although I am still trying to figure out how CNL Lifestyle benefits from a 7.25% interest rate).  The non-traded REITS are entering into sophisticated transactions that contain strict financial restrictions and require the REITs to operate within the debt covenants.  As an example of the level of complexity, the following passage is from CNL Lifestyle's indenture for its recent bond offering and details the restrictions, in mind-numbing legalese, on Lifestyle's distributions:

Section 4.07 Restricted Payments.

(a) The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly:

(1) declare or pay any dividend or make any other payment or distribution on account of the Company’s or any of its Restricted Subsidiaries’ Equity Interests (including, without limitation, any payment in connection with any merger or consolidation involving the Company or any of its Restricted Subsidiaries) or to the direct or indirect holders of the Company’s or any of its Restricted Subsidiaries’ Equity Interests in their capacity as such (other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of the Company and other than dividends or distributions payable to the Company or a Restricted Subsidiary of the Company);

(2) purchase, redeem or otherwise acquire or retire for value (including, without limitation, in connection with any merger or consolidation involving the Company) any Equity Interests of the Company or any direct or indirect parent of the Company;

(3) make any payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value any Indebtedness of the Company or any Guarantor that is contractually subordinated to the Notes or to any Note Guarantee (excluding any intercompany Indebtedness between or among the Company and any of its Restricted Subsidiaries), except a payment of interest or principal at the Stated Maturity thereof; or

(4) make any Restricted Investment (all such payments and other actions set forth in these clauses (1) through (4) above being collectively referred to as “Restricted Payments”),

unless, at the time of and after giving effect to such Restricted Payment:

(1) no Default or Event of Default has occurred and is continuing or would occur as a consequence of such Restricted Payment;

(2) the Company would, at the time of such Restricted Payment and after giving pro forma effect thereto as if such Restricted Payment had been made at the beginning of the applicable four-quarter period, have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the tests set forth in Section 4.09(a), 4.09(b) and 4.09(c) hereof; and

(3) such Restricted Payment, together with the aggregate amount of all other Restricted Payments made by the Company and its Restricted Subsidiaries since the date of this Indenture (excluding Restricted Payments permitted by clauses (2), (3), (4), (5), (6), (7), (8) and (9) of paragraph (b) of this Section 4.07), is less than the sum, without duplication, of:

(A) 95% of Funds From Operations of the Company for the period (taken as one accounting period) from January 1, 2011 to the end of the Company’s most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Funds From Operations for such period is a deficit, less 100% of such deficit); plus

(B) 100% of the aggregate net cash proceeds received by the Company since the date of this Indenture as a contribution to its common equity capital or from the issue or sale of Qualifying Equity Interests of the Company or from an issuance of Qualifying Equity Interests of the Company pursuant to the DRP (it being understood that for the purposes of this clause (3)(B), with respect to any issuance pursuant to the DRP, the Company will be deemed to receive net cash proceeds equal to the amount of the cash dividend they otherwise would have paid in respect of such Equity Interests) or from the issue or sale of convertible or exchangeable Disqualified Stock of the Company or convertible or exchangeable debt securities of the Company, in each case that have been converted into or exchanged for Qualifying Equity Interests of the Company (other than Qualifying Equity Interests and convertible or exchangeable Disqualified Stock or debt securities sold to a Subsidiary of the Company); plus

(C) to the extent that any Restricted Investment that was made after the date of this Indenture is (a) sold for cash or otherwise cancelled, liquidated or repaid for cash, or (b) made in an entity that subsequently becomes a Restricted Subsidiary of the Company, the initial amount of such Restricted Investment (or, if less, the amount of cash received upon repayment or sale); plus

(D) to the extent that any Unrestricted Subsidiary of the Company designated as such after the date of this Indenture is redesignated as a Restricted Subsidiary after the date of this Indenture, the lesser of (i) the Fair Market Value of the Company’s Restricted Investment in such Subsidiary as of the date of such redesignation or (ii) such Fair Market Value as of the date on which such Subsidiary was originally designated as an Unrestricted Subsidiary after the date of this Indenture.

Notwithstanding the foregoing, the Company and any of its Restricted Subsidiaries may declare or pay any dividend or make any distribution or take other action (that would have otherwise been a Restricted Payment) that is necessary to maintain the Company’s status as a real estate investment trust under the Internal Revenue Code if (i) the aggregate principal amount of all outstanding Indebtedness of the Company and its Restricted Subsidiaries on a consolidated basis at such time is less than 60% of Adjusted Total Assets and (ii) no Default or Event of Default shall have occurred and be continuing.

This is a very complex agreement, with repeated references to defined terms located elsewhere in the indenture.  It's a document written by lawyers for lawyers.  The way my non-lawyer eyes read the above clause is that Lifestyle can continue paying its current distribution rate to investors, but if Lifestyle's leverage exceeds 60% of assets, than the restrictions kick-in.  The REIT's leverage was at 55% of assets at year-end 2010.

The point is not the above legal jungle, but that this jungle is complex and the once financially staid world of non-traded REITs has embraced a treacherous path.  I don't believe that REITs accessing sophisticated financing is bad, actually I think it's good.  Interest rates are still near historic lows and it makes sense to take advantage of the low rates, if done in a prudent manner.  But the REITs need to understand that the banks are not their friends.  These lines of credits and bonds have restrictive covenants that REIT managers (as well as the broker / dealers that sell these non-traded REITs) need to read and understand.  Investors, too, need easy-to-understand disclosure - i.e. "if our leverage ratio (amount of debt divided by total assets) exceeds 60%, we will have to cut the distribution we pay you."  Banks will pounce if the covenants are not obeyed and ignorance is not a defense.   Banks do not come out on the short end of too many deals.

The low interest rates on the lines of credit are enticing, and make acquisitions more attractive.  But buying a long-term asset with short-term debt that provides accentuated returns is seductive, but unsustainable.  I am seeing lines of credit being used to repay maturing debt.  Retiring debt with a line of credit without a plan to replace the line of credit with either equity of permanent mortgage debt is reckless.  If REIT advisors don't act to quickly match property debt with the property's expected hold period, the REITs could be caught in a squeeze if interest rates rise, or if equity raises fail to match short-term debt maturities.  I suspect I'll be writing multiple posts about debt covenants in the future.

ARC Snark
This press release from American Realty Capital Trust (ARCT) popped up on my Google News feed over the weekend.  Here is the important part of the press release:

With the pending July 25, 2011, close of ARCT’s initial public offering, the Company’s advisor, American Realty Capital Advisors, LLC, intends to initiate the process of interviewing investment banking firms and other advisory firms to provide its board of directors with recommendations in exploring various strategic actions to maximize shareholder value, including the assessment of various liquidity alternatives.

ARCT commenced its initial public offering on January 25, 2008, and as of the date of this press release has raised total gross proceeds of $885.2 million. As of the date of this press release, the Company has acquired 320 properties for a total purchase price of $1.27 billion, consistent with the Company’s investment strategy, i.e., acquiring free standing, single tenant properties net leased long-term to investment grade and credit worthy tenants.”

Let me guess what's going to happen.  ARCT will hire JP Morgan as its advisor, ARCT will announce a plan to list its shares sometime before the middle of 2014, once ARCT's a listed company, investor shares will convert to liquid shares on a deferred basis, probably over eighteen months, and for the next three months wild rumors about near-term liquidity and high per share valuations will spread.   This is the playbook from Healthcare Trust of America.   Like Healthcare Trust of America, it is important to watch the liquidity and vesting of the shares paid to management, to make sure management is not cashing out first.   Buying a non-traded REIT is a long-term investment, never an arbitrage play.

Retail Fails to Follow Office and Apartments
The commercial retail real estate vacancy rate increased to 9.1% in 2010's first quarter, highest level in ten years.  Here is info from Calculated Risk and a detailed Bloomberg article. 

Good Commercial Real Estate News
From yesterday's Calculated Risk, here is a post discussing the first drop in office vacancy rates since 2007.  Reis Inc's quarterly survey on office properties shows that the national vacancy rates at the end of the first quarter 2011 stood at 17.5%.  The decrease was only .1% from 2010's fourth quarter, but after the last four years I will take any positive move.   Below is a chart from the post showing quarterly vacancies since 1991:

Today Calculated Risk has a post on Ries' quarterly apartment report, which shows vacancies at a three year low.   The vacancy rate is 6.2%, down from 8% a year ago.  Much of the drop in vacancy has come from the elimination of concessions.  Here is Calculated Risk's analysis on the drop in vacancies:

This is a very large decline from the record vacancy rate set a year ago at 8%. This decline fits with the recent survey from the NMHC that showed lower apartment vacancies. Reis is just for large cities, but this decline in vacancy rates is happening just about everywhere.

A few key points we've been discussing:
• Vacancy rates are falling fast (the excess supply is being absorbed). Note: The excess housing supply includes both apartments and single family homes.

• A record low number of multi-family units will be completed this year (2011). Only 6,000 apartments came on the market in Q1 (in the Reis survey area).

• This will push up effective rents. Via Bloomberg:

Effective rents, or what tenants actually pay, increased in 75 of the 82 markets Reis tracks, to an average $991 a month from $967 a year earlier and $986 in the fourth quarter.

However, when I was at the NMHC conference earlier this year, it sounded like rent growth is mostly coming from reductions in concessions and not from the top line (i.e. not from rent increases). (my short notes from conference here and here). Still, any increase in effective rents will push down the price-to-rent ratio for homes.

• Multi-family starts are increasing, and that will help both GDP and employment growth this year. These new starts will not be completed until 2012 at the earliest, so vacancy rates will probably decline all year.

If You Can't Beat Them, Join Them - Part II
I received the following comment on my previous post:

I read the filing differently. First, looking closely at ARCT’s 10K, the entire award to management is 1.5 million shares ($15 million). Not sure how you are arriving at $75 million. Second, only half the award is time vested. The other half is purely performance based and is paid only after the investor receives 100% of his/her capital back plus a non-compounded annual 6% return on capital. Finally, no vesting occurs at all for two years, and the award vests over a five year period. My take is that the independent board made the stock award based on management’s exemplary performance to date. Seems to me there is a big difference between this type of award and an internalization fee which seeks to retain management, irrespective of performance. At the end of the day, ARCT’s restricted stock plan is pay for performance. It merely recognizes the results achieved.

American Realty Capital Trust (ARCT) initiated the restricted stock awards program in January 2010.  The initial amount available for restricted stock awards was 1% of the amount of shares being offered or 1,500,000 shares, which totaled $15,000,000.  In the post effective amendment filed on March 11, 2011, the amount appears to have been changed to reflect no more than 5% of the shares outstanding, up to a maximum of 7,500,000 shares or $75,00,000 if all ARCT shares in the offering are sold.  At February 28, 2011, the amount of shares outstanding was 74,854,000.  So, 5% of 74,854,000 is 3,742,700 shares available under the incentive restricted share plan, which at $10 per share is $37,437,000.  Obviously, the amount of shares outstanding, and therefore amount available under the incentive restricted share plan, will increase as more shares are sold and ARCT moves towards the close of its offering period.

It is hard for me not to correlate the dropping of internalization fees in June 2010 and the recent, potential five times increase in shares available under the incentive restricted share plan.

The incentive restricted shares are not immediately vested.  Half the shares are paid over a four year period.  Half the shares have a subordination feature.  The subordination feature is not like the one described in the comment above, although that would be excellent if it was.  The incentive (subordination) feature is follows:

50% vest only to the extent our net asset value plus the distributions paid to stockholders equals 106% of the original selling price of our common stock.

I think it is best to use an example to how these shares may vest.  The 106% of the original offering price is $10.60 per share, which is the amount by which the combined net asset value and cumulative distributions must exceed before ARCTs' incentive restricted shares are allowed to vest.

ARCT is required to make a net asset value calculation eighteen months after it closes its offering.  Assuming ARCT closes its offering on June 30, 2011, it would have to provide a net asset valuation by December 31, 2012.  For illustration purposes, I'll use a net asset value of $8.85 per share, which is just the offering price of $10.00 per share less ARCT's offering costs, which are competitive with other non-traded REITs.   It is probable that the net asset value will differ from this amount.   Next you need to add ARCT's cumulative distributions to the net asset value.  (I don't read anything in the description above that reflects the timing of distributions.)  ARCT paid a 6.7% distribution in 2009.  In 2010 it paid 6.7% for three months and 7.0% for nine months.  If it continues to pay a 7% distribution in 2011 and 2012, it will have paid cumulative distributions of $2.74 per share by the end of 2012.   If the cumulative distributions of $2.74 are added to the $8.85 net asset value, and this totals $11.59, which is greater than the $10.60 share price that triggers the vesting.  The following table uses the paid distributions and the $8.85 per share net asset value price estimation:

2009	$0.65
2010	$0.69
2011	$0.70
2012	$0.70
Cumulative Distribuiton	$2.74
NAV at 12/31/2012	$8.85
NAV + Distributions	$11.59

Finally, I'd want to address the exemplary management comment.  I want ARCT's management to be exemplary, and this post or the previous post are not disparaging ARCT.  The non-traded REIT industry needs ARCT's management to be exemplary.  But to me, I think it is too early to bestow awards for excellent management, whether for ARCT or any REIT still in its offering phase.  Olympic gold medals in the 100-meter dash are not awarded after twenty yards, the Lombardi Trophy is not awarded at the end of the first quarter, and I have never heard of a baseball owner giving a manager a performance bonus in the middle of May.  A non-traded REIT (or any investment product) should not award multi-million dollar, dilutive, stock grants, whether restricted or not, to management while the REIT is still in its offering phase and while it is still investing investor capital.

If You Can't Beat Them, Join Them
I was alerted in a comment to this blog that American Realty Capital Trust has awarded its executives shares of restricted stock.  Here is the wording from the post-effective amendment that American Realty Capital Trust filed on March 11, 2011:

On September 13, 2010, our advisor granted 934,159 restricted shares of common stock to Nicholas S. Schorsch, chief executive officer of our advisor, 212,370 restricted shares of common stock to William M. Kahane, president and chief operations officer of our advisor, 160,604 restricted shares of common stock to Peter M. Budko, executive vice president chief investment officer of our advisor, 55,270 restricted shares of common stock to Edward M. Weil, Jr., executive vice president and secretary of our advisor and 37,597 restricted shares of common stock to Brian S. Block, executive vice president and chief financial officer of our advisor. Fifty percent of the restricted shares vest over a four year period commencing with the one year anniversary of the September 13, 2010 grant date and 50% vest only to the extent our net asset value plus the distributions paid to stockholders equals 106% of the original selling price of our common stock.

On June 2, 2010, American Realty Capital Trust announced that it was waiving any internalization fees in the event that it internalizes its external advisor as part of of a sale or listing American Realty Capital Trust's shares on an exchange.  The awards above came about three months after the announced waiver of any internalization fees.   The pool of stock available to award is up to 7.5 million shares, which at $10 per share is $75 million.   In the quote above, at $10 per share, the awards last September are worth nearly $10 million to Nicholas Schorsch and over $2 million to William Kahane. The bulk of the shares that American Realty Capital Trust can allocate to its executives is still available for allocation.


Internalization fees can be lucrative to the external advisor, and some non-traded REITs have paid more than $100 million for their advisors.   American Realty Capital Trust's decision to waive internalization fees was positive for investors.

The company that distributes American Realty Capital Trust is Realty Capital, which also distributed Healthcare Trust of America (HTA).  HTA waived its internalization fees in 2009, but recently expanded its pool for executive and board member stock awards by $80 million.  It looks like American Realty Capital is following HTA's path.

Half of the American Realty Capital executive stock awards are deferred over four years and half vest only "to the extent our (American Realty Capital Trust) net asset value plus distributions paid to stockholders equals 106% of the original selling price of our common stock." 

To me, American Realty Capital's granting of large amounts of stock to its executives is another form of an internalization fee.  The large amount of stock was issued by American Realty Capital Trust after the announcement that there would be no big pay day when it purchased (internalized) its advisor, plus American Realty Capital has plenty more stock it can grant its executives.  Like HTA, American Realty Trust appears to have figured a way around its waived internalization payday.

The Return of Subprime Bonds
Here is a Wall Street Journal article on how pricing on subprime bonds has rebounded and how subprime bonds are attracting investors, including conservative insurance companies.  The focus of the article is on existing subprime bonds, which as an investment class, saw prices drop to near $.30 on the dollar at the worst of the credit crisis.  Subprime bonds are now trading near $.60 on the dollar.  The article's point is that subprime bonds' recent strength signifies a healing of the credit markets, as investors are willing to take on more risk.

The return of subprime bonds, according to the article, is also signaling that the housing market has bottomed and has more upside than downside.  The article focused on subprime bonds issued before the credit crisis.  It did not mention any new issues.  I'd be curious to know if there is any demand for new issue subprime bonds, or if there are even any new subprime mortgages that could be included in a new subprime bond issue.

One encouraging sign is the govenment's refusal to take the short end of an offer by bailed-out insurer AIG:

The market burst into the spotlight in March when an unlikely buyer stepped in: AIG, the giant insurer that had to be bailed out by the government because of its own bad bets on subprime mortgage bonds.

AIG offered to buy back a pool of bonds that the Federal Reserve had taken off its hands during the crisis. AIG's $15.7 billion offer for the bonds, which have a face value of $30 billion, spurred other investors to consider making offers.

Citing "improved conditions" in the market and "a high level of interest by investors," the Fed on Wednesday rejected AIG's offer and said it would begin selling off these mortgage holdings, letting investors bid for pools of bonds and individual securities so the central bank can maximize its profits.

At least four large life insurers, among the most conservative of all investors, are eyeing the subprime bonds the Fed plans to sell, according to people familiar with the matter.