Friday, March 02, 2012

Inland Western's (Archaic) Listing?

On February 28, Inland Western REIT filed a letter it sent to investors.  The letter is optimistic, and I could write a snarky post poking each sanguine point.   But the key paragraph that caught my eye was at the end of the letter where Inland Western stated:
As previously communicated, we continue to pursue the initial listing of our existing common stock on a national securities exchange. We currently intend to complete the listing in 2012, and we are in the process of finalizing the terms of the phased-in liquidity program that we intend to implement in connection with the listing. As was described in our proxy statement for our special meeting in February 2011, we currently anticipate that we will implement a phased-in liquidity program that will provide for the listing of 25% of your existing shares of common stock concurrent with the initial listing and the listing of an additional 25% of your existing shares of common stock on each of the six-month, 12-month and 18-month anniversaries of our initial listing. We will provide you with further information regarding the expected timing of the listing and impact of the listing of our common stock on your existing holdings as the process progresses. Although we do currently intend to pursue an initial listing within the foregoing timeframe, we cannot guarantee that such a listing will occur and timing could be impacted by overall economic and other conditions and factors.
Inland Western told investors that it plans to list its shares sometime in 2012, but it will only make shares available in 25% increments, with each share release spaced out over six months.  Under this structure, investors will not receive full liquidity for eighteen months after the date Inland Western initially lists its shares.

Inland Western internalized (bought with its stock) its advisor in 2007, at a value of $375 million.  (This fee was approximately 8% of Inland Western's equity, which, based on this metric, was not the cheapest nor the most expensive internalization.)  The internalization generated lawsuits and in July 2010, Inland Western agreed to return 9,000,000 shares, which lowered the internalization to $285 million (assuming the initial valuations were done on the REIT's $10 per share offer price).  Based on Inland Western's current $6.95 net asset value share price, I figure the internalization fee is now 30.5% less than $285 million, or $198 million.  If anyone has more accurate figures, I will post them.  Obviously, at minimum, Inland Western's sponsor is likely subject to the same delayed listing schedule as investors, and the $198 million will fluctuate with the market price for Inland Western's shares. 

(Here is a June 2010 article from that discusses non-traded REIT internalization fees and from which I obtained the $375 million value listed above.  The article has this whopper quote from Stanger's Kevin Gannon:
"There is nothing wrong with non-traded REITs paying to internalize management because they bring in-house good people, who know the REITs and their assets. But sometimes the dollar amounts have been large and there's been some criticism for that," said Kevin Gannon, a managing director with Stanger.
 There's no wonder why non-traded REIT sponsors love this guy.)

There are plenty of other non-traded REITs that raised money in the mid-2000s that have yet to internalize their external advisor.  Unless a REIT sponsor has specifically amended its REIT's documents, most REITs offered in the mid-2000s have the ability to internalize their advisors.   In today's environment, it'd be hard for a sponsor to justify, rationalize or explain a huge internalization fee.  A situation where a REIT's NAV per share is less than the original offer share price per share would make an internalization decision even more difficult.  If a sponsor is raising capital in another REIT, all the fees associated with that offering or offerings would be in jeopardy if broker / dealers cancel selling agreements due to the internalization fees.  Termination agreements may not be wide spread, but what REIT sponsor is going to take the chance.  Let's hope Inland Western is the last non-traded REIT that hits investors with a large internalization fee.

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