Friday, January 27, 2012

Say What?

Here is an example of double-speak gobbledegook from an Inland Western 8-K/A filing:
In light of these results, the Company has determined to hold an advisory vote on named executive officer compensation every year until the next advisory vote on the frequency of future votes on named executive officer compensation.
Ok, that's a head-scratching, confusing jumble of words.  It is also meaningless.  The REIT is allowing shareholders an advisory vote on executive compensation.  Advisory votes are just that, advisory.  The votes are non-binding and don't impact any actual compensation.  Here's my advisory recommendation:  no named executive should get any salary increase until Inland Western's current $6.95 share price is increased and becomes equal to or greater than the price investors originally paid for their shares. 


If fees fall in a forest, do they make a sound?  Yes.  It's a slow-building, rumbling sound that will echo for some time.  Wells Timberland REIT filed an 8-K on Tuesday, January 24th, where it quietly announced that its advisor, Wells Timberland Management Organization, LLC (Wells TIMO) had permanently "discharged" $25.1 million in accrued and unpaid management fees and expense reimbursements.  These fees and expenses had accrued due to lender restrictions that were part of the debt Timberland REIT utilized to acquire its timber assets.  These fees had been a drag on this REIT because the fees were in a priority position to investor capital.  At September 30, 2011, the REIT had $27.3 million Due to Affiliates, of which $24 million was advisor fees and reimbursements payable to Wells TIMO.

The fee forgiveness is positive for investors and the right decision by Wells.  The REIT will continue to pay fees to Wells TIMO, but lender restrictions have been lifted due to debt paydown, and future fees will be paid as incurred, and not accrue any more. 

(Forest picture from Google Images and the website and is no relation to Wells Timberland REIT.)

Tuesday, January 24, 2012

Commercial Mortgage Refinancing

Here is a must-read article on commercial mortgage refinancings from Bloomberg.  The article's premise is that mortgages in strong real estate markets, in particular Manhattan, are able to get refinanced, while properties in smaller markets get less lender consideration.   The article used a Vornado-owned Manhattan property's $430 mortgage as a refinance example.  One fact that doesn't make it in the article's introduction is that Vornado paid the mortgage down by $130 million, which of course made the refinance easier.  This level of mortgage paydown would have allowed a refinance in most markets.  The question is in how many markets are property owners going to be willing to add that much equity to refinance a property?  For markets that have not recovered and owner equity gone, I suspect most property owners will take their chances with special servicers rather than putting in additional equity.

The article makes reference to Linen & Things, which I mentioned yesterday (emphasis added):

That may not be enough to bail out the Baybrook Gateway Mall in Webster, Texas, 22 miles (35 kilometers) northwest of Houston. 

A $41 million mortgage on the shopping center, originated by Goldman Sachs Group Inc. in December 2006 and sold as part of a commercial-mortgage bond deal two months later, was handed over to a firm that handles troubled loans because the borrower couldn’t refinance debt that matured this month, according to Fitch Ratings. So-called special servicers determine whether to modify loan terms or foreclose on property owners struggling to make payments.

Baybrook, co-owned by Blackstone Group LP’s Brixmor Property Group Inc. and JP Morgan Chase & Co., is currently working with the special servicer to resolve the finances, Stacy Slater, a spokeswoman for Brixmor, said in a telephone call. The mall lost tenants, such as Linens ‘n Things Inc. which filed for bankruptcy in 2008, she said, declining to comment further.
The article references a property in KBS REIT I that defaulted on its mortgage on January 11th.  I have not yet seen a KBS REIT I filing on this (but I am not sure whether it has to make an 8-K filing).  Here is the paragraph from the article:

A $43.5 million mortgage on One Citizens Plaza, a 224,089 square-foot office building that houses the headquarters of Citizens Financial Group in Providence, Rhode Island, also ran into trouble this month before its Jan. 11 maturity date, according to Fitch. Though the building was 98 percent occupied as of September, the borrower didn’t repay the mortgage originated by Wachovia Corp. in 2006, Bloomberg data show.
“We are just beginning communications with the lender about this loan,” said David Snyder, chief financial officer of KBS Realty Advisors, a private-equity real estate investment company in Newport Beach, California that owns the property. “At this juncture we are unable to predict the outcome,” he said in an e-mail.
There is other good information in the article including noting that the market for CMBS has recovered to its levels of last July, which means new origination.

Monday, January 23, 2012

It's Good To Be King

I just saw this Bloomberg article about Blackstone receiving $6 billion in commitments (on its way to $10 billion) for its latest real estate fund, Blackstone Real Estate Partners VII, which will focus on distressed real estate.  The $6 billion is not far from the total amount that non-traded REIT sponsors raised in all of 2011.

Private Equity Explained

Here is an excellent article from The New Yorker explaining private equity - good and bad.  (If the link doesn't work, the author is James Surowiecki.)  There has been plenty of misinformation the past few weeks related to private equity.  The job creation issue is tackled here:
Given the weak job market, it makes sense that the attacks have focussed on layoffs. But the real problem with leveraged-buyout firms isn’t their impact on jobs, which studies suggest isn’t that substantial one way or the other. A 2008 study of companies bought by private-equity firms found that their job growth was only about one per cent slower than at similar, public companies; there was more job destruction but also more job creation. And, while private-equity firms are not great employers in terms of wage growth, there’s not much evidence that they’re significantly worse than the rest of corporate America, which has been treating workers more stingily for about three decades.
Here is an example of the "bad" private equity: 
In 2004, for instance, Wasserstein & Company bought the thriving mail-order fruit retailer Harry and David. The following year, Wasserstein and other investors took out more than a hundred million in dividends, paid for with borrowed money—covering their original investment plus a twenty-three per cent profit—and charged Harry and David millions in “management fees.” Last year, Harry and David defaulted on its debt and dumped its pension obligations. In other words, Wasserstein failed to improve the company’s performance, failed to meet its obligations to creditors, screwed its workers, and still made a profit. That’s not exactly how capitalism is supposed to work. 
The people who ran Harry and David into the ground have a defense: economic conditions changed in unforeseeable ways. But that’s precisely why loading firms with debt in order to reap short-term benefits is bad. It leaves companies unable to weather tough times, and allows private-equity firms to make money even if things go wrong.
As if this weren’t galling enough, taxpayers are left on the hook. Interest payments on all that debt are tax-deductible; when pensions are dumped, a federal agency called the Pension Benefit Guaranty Corporation picks up the tab;
Many landlords that had private equity tenants (Mervyn's, Linen & Things, Steve & Barry, etc.) were impacted by similar tactics and were left with empty space when the retailers could not survive an economic slowdown due to their leveraged capital structure.

Profile In Courage

Here's an article from InvestmentNews on Behringer Harvard.  This sentence stood out to me:
Meanwhile, other broker-dealers — including FSC Securities Corp., Royal Alliance Associates Inc. and SagePoint Financial Inc., which constitute the American International Group Inc.'s Advisor Group — stopped selling the Multifamily REIT last summer when its offering period ended, according to spokeswoman Linda Malamut.
Is stopping sales when a deal closes its offering period really stopping sales?  Hasn't the bird flown, or the cows left the barn, or the fat lady sung, or the lights been turned off because the party's over?  The answers, of course, are No and Yes.  AIG didn't stop sales and sold Behringer Harvard through the end of its offering. Period.

Behringer Harvard Multifamily's distribution overpayment was no secret.  Multifamily neatly presented this fact every quarter throughout its long offering period.  This was a better story two years ago when broker / dealers had an actual decision to make.

I think a better question is what are broker / dealers doing now about other non-traded REITs that are two and three years into their offering periods and not making any headway towards covering their distributions.  Like Multifamily, these REITs disclose quarterly their inability to adequately fund their distributions. 

Thursday, January 19, 2012

Cherry Picking Housing Data

I believe the worst of the housing crisis is behind us and and am now a housing bull.  I look for data to support my opinion (and am skeptical of data that doesn't!).  I saw this stat this morning on the indispensable Calculated Risk website.  Housing completions in 2011 were the lowest since record keeping began in 1959.  Here is the quote:
Single family starts were down 9% in 2011 to 428,600. This is the lowest level of single family starts since the Census Bureau started tracking starts in 1959!
The entire post is worth reading.  Low supply is good for prices. 

Natural Gas Leak

I posted on January 9th about the disconnect between the price for shale acreage and natural gas prices.  Natural gas was $3.00 per mmbtu at the time of the post.  Today I see that NYMEX Henry Hub natural gas futures are under $2.35 per mmbtu.  I'm not sure what's behind the plunge.

Update:  Here's a CNBC article on why natural gas prices are falling.  Basically a warm winter and plenty of supply.

Thursday, January 12, 2012

Rolled Over by Leases

The Wall Street Journal had a good, free article yesterday on the problems facing some office real estate, as leases signed at the peak of the real estate boom are expiring.  Landlords are faced with a market with lower lease rates:

Rents in most markets are still well below what they were in 2007, with the drop in some areas as much as 26%, according to data firm Reis Inc. Because of the weak market, landlords with empty space or expiring leases also have to spend large amounts on incentives to attract tenants, like free rent and interior work.
Offices that were purchased near the peak with a corresponding five-year mortgage have a compound problem.  It's difficult to refinance a mortgage when faced with lower rents and a higher vacancy rate.  The article states that defaults and foreclosures are rising for office space, and are expected to continue to rise, while real estate property types that able to adjust rents, like apartments and hotels, are seeing drops in foreclosures. 

The article lists major metropolitan markets like New York, Washington DC, and Boston as exceptions, as values in these markets have increased.   The article is worth reading and has plenty of examples.

Monday, January 09, 2012

Worrying Disconnect

Here is a Bloomberg article on the record prices being paid for shale drilling acreage.  Here is a telling paragraph from the article:

Marubeni Corp. (8002), the Japanese commodity trader, last week agreed to pay as much as $25,000 an acre for a stake in Hunt Oil Co.’s Eagle Ford shale property in Texas. The price, which includes future drilling costs, exceeds the $21,000 an acre Marathon Oil Corp. (MRO) paid last year for nearby prospects owned by KKR & Co. (KKR)’s Hilcorp Resources Holdings LP. In the Utica shale of Ohio and Pennsylvania, deal prices jumped 10-fold in five weeks to almost $15,000 an acre, according to IHS figures.
The article details industry justification for the high prices and explains why prices may go higher.  Demand from foreign oil companies wanting access to US gas acreage is helping push up prices for shale gas acreage.

The record prices are against a backdrop of natural gas near $3.00 per mmbtu.  The price per mmbtu has been trending down for over a year, dropping more than 33% in value.  The chart below is one year's natural gas futures prices from

The disconnect between the prices oil companies are paying for acreage and the current price for natural gas is alarming.  It's important to remember that shale gas plays involve hydraulic fracking, which is an expensive form of gas extraction.  I don't see how the disparity can continue, either natural gas is poised for a big run, or acreage is going to get much cheaper.

Non-Traded REIT Fodder

Non-traded REIT sponsors use the high correlation of publicly traded REITs to the stock market as a reason to invest in non-traded REITs (since of course non-traded REITs don't trade so they can't correlate with stock market movements).  Below are two graphs I saw over the weekend that show correlations between various asset classes and the S&P 500.  The graphs are from the website The Reformed Broker, which reprinted the data from Factor Advisors.  The correlation of many asset classes has increased over recent years, including traded REITs, giving a twisted credence to a non-traded REIT marketing point.

I suspect we'll be hearing more about the high correlations between the S&P 500 and publicly traded REITs.

Big Deal or No Big Deal?

I worked my way through Griffin-American Healthcare REIT II, Inc.'s (GARH) new prospectus after reading last week's InvestmentNews article on American Realty Capital's attempt to nominate an alternative board of directors to GAHR's board.  I did not see any additional references to the alternative directors other than the language on which the InvestmentNews article was based, which I have reprinted below:
Notice of Stockholder Intent to Nominate Directors
We have received correspondence from a stockholder and another individual notifying us of their intention to nominate an alternative slate of directors for election at the 2012 annual meeting of stockholders. The notices, which are substantially the same, name persons associated with one or more entities related to American Realty Capital, one of our competitors, as proposed nominees. The notices also identify such entities, and certain individuals associated with such entities, as “stockholder associated persons,” which in this case means that such persons are acting in concert with the individuals who submitted the notices.
The above was listed on page 135 of a 220-plus page document.  Is the nomination of an alternative slate of directors a big deal, or just a competitor trying to complicate GAHR's transition to a new advisor and sponsor.  I will have to wait and wade through additional filings to get an answer.  I just hope the next update, if any, is not a small paragraph in the middle of a 200-page legal document.  (GARH filed an updated prospectus this morning, and the language read the same as last week's filing.)

Friday, January 06, 2012

Temperature Rises In Healthcare Battle

I noted last month that American Realty Capital Healthcare Trust made an unsolicited offer for Grubb & Ellis Healthcare Trust II (which has now changed its name to Griffin-American Healthcare REIT (GAHR)), which was rejected by GAHR's board.  It appears that American Realty Capital Healthcare Trust has not abandoned its pursuit of Griffin-American.  Here is an InvestmentNews article on the latest developments.  The article was based on a GAHR filing.  Here is a quote from the article, taken directly from GAHR's filing:

“We have received correspondence from a stockholder and another individual notifying us of their intention to nominate an alternative slate of directors for election at the 2012 annual meeting of stockholders,” the company said in the filing.
“The notices, which are substantially the same, name persons associated with one or more entities related to American Realty Capital, one of our competitors, as proposed nominees,” according to the filing. “The notices also identify such entities, and certain individuals associated with such entities, as ‘stockholder associated persons,' which in this case means that such persons are acting in concert with the individuals who submitted the notices.”
I wrote last month that I wouldn't have been surprised if this fight escalated.  It looks like I was right.

Wednesday, January 04, 2012

GBE Delisting

Grubb & Ellis Company (GBE) was notified yesterday by the New York Stock Exchange that its shares will be suspended on January 6, 2011 and the NYSE will begin the process of delisting GBE's stock.  Here is the language from the 8-K:

On January 3, 2012, the New York Stock Exchange (the "NYSE") notified Grubb & Ellis Company (the "Company") and issued a press release that NYSE determined that trading on the NYSE of the Company's common stock should be suspended prior to the opening on January 6, 2012, and that it intends to begin the process to delist the Company's common stock. The NYSE notified the Company that it was not in compliance with the NYSE's continued listing standard that requires the Company's average global market capitalization to be at least $15 million over a consecutive 30-trading-day period.

The Company intends to appeal the NYSE's determination. In accordance with the NYSE policies, the NYSE will not take any additional action to pursue delisting of the stock until the appeal has been fully exhausted in accordance with the NYSE procedures.

Effective January 6, 2012, the Company's common stock will trade on the OTCQB Marketplace under the symbol yet to be determined. The transition of the Company's stock to the OTCQB Marketplace will have no effect on the Company's shares and Grubb & Ellis' shareholders remain owners of the common stock and will be able to trade the stock on the OTCQB Marketplace as of January 6, 2012. In addition, the transition to the OTCQB Marketplace does not change the company's obligation to file periodic and other reports with the Securities and Exchange Commission under applicable federal securities laws.

The Company had previously fallen below the NYSE's continued listing standard for average global market capitalization over a consecutive 30 trading day period of less than $50 million and latest reported shareholders' equity of less than $50 million as well as the average closing price of less than $1.00 over a consecutive 30 trading day period. The Company's business plan to address these issues was previously accepted by NYSE Regulation, however the NYSE has decided to that the Company's business plan is not sufficient to also bring the Company into compliance with the continued listing standard of an average global market capitalization of at least $15 million over a consecutive 30-trading-day period. The notice of suspension received from the NYSE does not currently impact the Company's obligations under its outstanding debt or preferred equity securities.

HTA Largess

Healthcare Trust of America's executive team had a lucrative Happy New Year.  In Form 4s filed yesterday, four HTA executives received generous stock grants on on January 1, 2012.  The CEO received 75,000 shares, the CFO received 50,000 shares, the EVP of Acquisitions received 50,000 shares and the EVP of Asset Management received 40,000 shares.  At the current $10 per share price, this translates to grants valued at $750,000, $500,000, $500,000 and $400,000, respectively, for each of the four executives.  HTA is paying a 7.25% annual distribution and the four executives will all earn the full distribution on their new shares, which ranges from $54,375 annually for the CEO, to $29,000 annually for the EVP of Asset Management.  

HTA has granted stock before.  Below are the cumulative shares (listed in the Form 4s filed yesterday) for each of the four executives, the value at $10 per share, and the annual income the shares generate to the executives at the current 7.25% distribution rate:

Shares Value Annual Income
CEO 460,000  $4,600,000  $333,500
CFO 201,529  $2,015,290  $146,109
EVP - Acq 217,148  $2,171,480  $157,432
EVP - Asst Mgt 65,000  $650,000  $47,125

Since the stock grant occurred on January 1, 2012, it will not be listed in HTA's 2011 10-K, which will be released in March or April.  HTA, as of September 30, 2011, is still not generating enough operating cash flow to cover its current distribution.  HTA generated $86,260,000 in operating cash flow for the first nine months of 2011, while it paid distributions of $119,621,000 over the same period; so operating cash covered about 72% of HTA's paid distribution.