The Day the Internalization Fee Died

June 28, 2012 will be remembered as the day the internalization fee officially died.  As noted in the previous post, Wells Real Estate Investment Trust II disclosed yesterday that it will not pay to internalize its advisor.  This is big news, real big news. 

I don't imagine the decision was easy.  Yesterday's filing, which detailed a prolonged transition period to self-management, and the payment of an asset management fee through 2013, indicates to me that there were probably tense negotiations between Leo Wells and the REIT's independent directors.  While the independent directors may have been the driving force behind the no internalization fee push, Leo Wells should ultimately get the credit, because it's his name on the company and he had to agree to the final decision.

Internalization fees have become a four-letter word with broker / dealers and investors, and an automatic lawsuit button for attorneys.  The negative fallout from Wells Real Estate Investment Trust's (now Piedmont Office Realty Trust) internalization still reverberates, and the internalization fee involved is mentioned in articles on non-traded REITs, and Leo Wells is presented as Exhibit A for non-traded REIT sponsor greed.*   These factors probably made Wells REIT II's decision easier.  But still, Wells REIT II is a $6 billion REIT and an internalization fee would have likely been in the hundreds of millions of dollars, so even after paying attorney fees for fending off lawsuits, there would have been a huge pot of money left over. 

Almost all non-traded REITs retain language in their offering documents that allow for internalization fees, even with their negative perception in the market.  I think only the American Realty Capital REITs and Griffin American Healthcare REIT II state in writing that they will not pay internalization fees to acquire their Advisors.  (If I am wrong, or if you know other non-traded REITs that have explicit language eliminating internalization fees, please comment.) 

American Realty Capital Trust's fee-waived internalization and listing early this year were a major step forward for investors and the non-traded REIT industry, and a challenge to other sponsors to follow ARC Trust's lead.  Griffin-American Healthcare REIT II's and CB Richard Ellis Realty Trust's decisions to skip internalization fees were major tremors.  Wells REIT II's decision yesterday was the final tectonic shift for the non-traded REIT industry.  No sponsor can now charge an internalization fee.  Leo Wells is as Old School as you're going to find in the real estate syndication business, a product of the initial wave of real estate limited partnerships in the early 1980s.  When an industry icon like Leo Wells makes the decision that it's time to forgo an internalization fee, the fee is dead. 

*  Please, no comments on Piedmont's $170 million internalization fee.  This was the approximate amount at the time of internalization, not the value when Piedmont eventually listed, and I believe most of the shares issued to Wells Real Estate Funds (i.e. Leo Wells) have not been sold.  Yes, it was a significant amount of money, but other sponsors made more money, both in terms of the dollar amount of the fee and the internalization fee as a percentage of original offering size.

Wells REIT II's No Internalization Fee Internalization

Wells REIT II filed an 8-K this afternoon detailing changes between the REIT and its sponsor, Wells Real Estate Funds (Wells REF), as the REIT moves towards becoming self-advised.   The 8-K details changes to the advisory and other agreements, but the big news in the filing is that the REIT will not pay a fee to acquire its advisor.  There will be transition costs and advisory fees during the transition, which are partially described below (see the 8-K for full terms of the new agreements), but the main point is that Wells REIT II will not pay an internalization fee.  Here is the language:

Company (Wells REIT II) will have the option to acquire WREAS II (Wells REIT II's advisor) at any time during 2013 (the “WREAS II Assignment Option”). No payment is associated with the assignment;

The REIT, its advisor, and Wells REF are modifying agreements, which in the near term lower the REIT's fees, and in the long term allow for a smooth transition to self-management.  The revised Advisory Agreement commences July 1, 2012, and goes through December 31, 2012.  The REIT expects to enter into another one-year advisory agreement upon expiration of the revised Advisory Agreement.   The REIT will continue to pay an asset management fee through December 31, 2013, regardless of the internalization date.

In addition, the REIT, its advisor and Wells REF have entered into a Transition Services and Consulting Agreement, where the REIT's advisor will pay Wells REF $6 million, payable in 12 monthly installments of $500,000.  The purpose of the agreement is to transfer employees and assets to the REIT to allow it to become self-advised.  The employee and asset transfer is expected to occur by January 1, 2013, but no later than June 30, 2013.  The REIT will also have the right to acquire its advisor at any point during this time frame.

In reading the 8-K, it sounds like the transition to self-management will take six months minimum and twelve to eighteen months maximum, and that the asset management fee will be paid until December 31, 2013.  This is a long time to convert to self-management and it'd be better if the asset management fee terminated upon the completion of the internalization, but a lack of internalization fee is positive and is good news for investors.

Tick-Tock, Tick-Tock... Cont.

I have not posted on all the CEO-neutering changes occurring at Chesapeake, but this article from Bloomberg is worth noting.  It compares JP Morgan's and Goldman Sachs' approach to Chesapeake; in short, Morgan shunned and Goldman wooed.  These two paragraphs are amazing:

McClendon is known as one of the energy industry’s biggest risk-takers. Forbes magazine last year called him “America’s most reckless billionaire.” He founded the company in 1989, going on buying sprees that eventually amounted to a portfolio of oil and gas fields that covers an area half the size of New York State.

Along the way, McClendon has outspent cash flow in 19 of 21 years, relying on asset sales or financing transactions to stay afloat. That has sometimes left the company, with unsecured debt rated as junk by Standard & Poor’s and Moody’s Investors Service, exposed to swings in oil and gas prices. Beset by low oil prices, the company put itself up for sale in 1998, failing to secure a buyer.

Chesapeake has had negative cash flow in 19 of 21 years and needed asset sales or additional financing to keep running.  It's no wonder the traditional banking mentality at Morgan led to Chesapeake avoidance, while the deal-oriented investment bankers at Goldman loved Chesapeake. 

Occupancy Over / Under

Strategic Storage Trust, fresh off raising $46 million of equity in May, disclosed in an 8-K filing today that it has agreed to purchase 16 storage properties in the Southeast, called the Stockade Portfolio.  The acquisition has not been finalized and is subject to various considerations before it closes.  This transaction reminds me of the 12-property Homeland Portfolio that Strategic Storage closed at the end of 2011.  Like Homeland Portfolio, Stockade is a multi-property portfolio in the Southeast, and like Homeland, Stockade's aggregate occupancy was not provided in an initial 8-K.  After the Homeland Portfolio acquisition closed, Strategic Storage disclosed that the portfolio's occupancy was 46%.  I am curious to know Stockade's aggregate occupancy, and I'll start the over / under occupancy guessing at 52%.  Comment with your guess.  (I am not making a distinction between physical or economic occupancy, just whatever occupancy Strategic Storage discloses.)

Here's a hint or just useless noise: I checked the Stockade website and Stockade is offering a web promotion of $15 off the first month's rent at any of its properties.  This is not much of an inducement, which could indicate a stronger occupancy than I am estimating.  Specific properties, however, may have have their own specials not listed on the internet, I don't know.  I'm sticking with 52% occupancy, for the simple premise that if it was higher Strategic Storage would have touted disclosed it.

Update: Who took the over?  Strategic Storage filed a supplement to its prospectus this morning, and in it stated that:

The average physical occupancy of the 16 properties in the Stockade Portfolio was approximately 70% as of May 31, 2012. 

 As I noted in the original post, I'll take the occupancy as listed.  

Monday Night Reading

I just read a good article in the June issue of The Atlantic by William D. Cohan on the financial crisis.  This paragraph at the end of the article stood out:

The problem on Wall Street has never been about the absolute amount of leverage, but rather about whether financiers have the right incentives to properly manage the risks they are taking. During Wall Street’s heyday, when these firms were private partnerships and each partner’s entire net worth was on the line every day, shared risk ensured a modicum of prudence even though leverage was often higher than 30-to-1. Not surprisingly, that prudence gave way to pure greed when, starting in 1970 and continuing through 2006, one Wall Street partnership after another became a public corporation—and the partnership culture gave way to a bonus culture, in which employees felt free to take huge risks with other people’s money in order to generate revenue and big bonuses.

Cohan argues that regulation that caps investment banks' leverage will stifle financial innovation and hurt the economy.  A better method, he states, is to not focus on leverage but align personal financial risk with compensation, which will improve risk management and keep creativity.

Behringer Harvard Multifamily Filing

In a late Friday filing, Behringer Harvard Multifamily REIT announced:

In connection with our consideration of strategic alternatives, we are in possession of material non-public information and based on the advice of outside legal counsel our board of directors has decided that suspension of our Second Amended and Restated Share Redemption Program (the “SRP”) is in the best interests of our company and our stockholders.  Accordingly, the SRP has been suspended indefinitely, effective as of June 18, 2012.  Our board of directors may in the future reinstate the SRP, although we can provide no assurances as to if or when this will happen.

It appears that the REIT is looking at some sort of undisclosed big transaction, big enough to warrant canceling its share redemption program.  Behringer Harvard Multifamily I had announced in its 2012 first quarter 10-Q that it had hired an investment bank to explore strategic alternatives, which is a euphemism for seeking a sale of the company or its assets, or a merger with another company. 

In its first quarter 10-Q, the REIT lists $2.8 billion of assets, including $613 million of cash.

The Real 1% - Div Cap Total Realty Trust Investors

Dividend Capital's Total Realty Trust (TRT), a non-traded REIT, filed an 8-K yesterday where it disclosed that it's going to redeem 130,000 shares in the second quarter as part of its quarterly share repurchase program.  The 8-K stated that TRT had received redemption requests for 12.8 million shares as of the second quarter's redemption request deadline date.  The amount of shares TRT will redeem is only 1% of redemption requests - or one cent for every one dollar of redemption requests.  In its benevolence, TRT announced it will redeem the 1%, pro rata.  Don't spend that whole penny in one location.  I casually watch non-traded REIT redemption requests, but I can't remember such a large disparity for a non-traded REIT with an open share repurchase plan like TRT's.

TRT's large gap between redemption requests and actual redemptions is not new, but it's progressively getting worse, as the requests increase and the number of shares TRT redeems decreases.  Here is a table from TRT's 2012 first quarter 10-Q:

The following table sets forth relationships between the amount of redemption requests received by us pursuant to our share redemption program, the resulting pro-rata redemption caps, and actual amounts of shares redeemed for each of the last four quarterly periods (share amounts in thousands).

Period		Total Number of Shares Requested				Redemption Cap				Pro-rata Percentage of Redemption Requests Redeemed by Us				Shares Redeemed Pro-rata				Shares Redeemed Pursuant to Death and Disability Puts				Total Number of Shares Redeemed
Q2 2011			10,000				890				9	%			850				379				1,229
Q3 2011			11,200				1,000				9	%			968				538				1,506
Q4 2011			11,400				826				7	%			810				446				1,256
Q1 2012			11,700				628				5	%			628				883				1,511
Total			44,300				3,344				8	%			3,256				2,246				5,502

See “Part II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds” of this Quarterly Report on Form 10-Q for more information regarding redemptions of shares during the three months ended March 31, 2012

TRT's second quarter figures are worse than any quarter above, and if its Q2 statistics were added to the table above, they would show a 9.4% increase in share redemption requests to $12.8 million shares;  a 79.3% drop in actual redemptions to 130,000 shares; and an 80% drop in the pro rate redemption percentage to 1%.  

Lifesaver or Lead Balloon?

Here is an InvestmentNews article about CNL and Behringer Harvard teaming up to sell two of CNL's REITs, Global Growth and Global Income, both that are advised by Macquarie.  The two REITs have raised, combined, approximately $100 million in the more than two years they have been available to broker / dealers.    If CNL really wanted to help Behringer Harvard's sales force, it would have allowed them access to the two CNL deals that are actually generating meaningful sales, the CNL Healthcare REIT and the Corporate Capital Trust business development corporation, not the two lagging Macquaire REITs.

Looking Under The Hood

I just saw this article on yahoo.finance.  Autotrader.com has filed to go public, but six weeks ago it borrowed $400 million to pay insiders a one-time dividend.  From the article:

New federal filings show that Autotrader.com is looking to become the first internet company to retest the waters of the IPO market since Facebook's May 18th debut. There's only one problem; six weeks ago AutoTrader insiders borrowed $400 million in order to turn around and pay themselves a one-time dividend in the same amount. I call it, cashing in before you cash out, while my co-host Jeff Macke is more blunt.

"There's nothing illegal about this, it's just kind of scummy," he says in the attached video. "They've made it a lesser company and immediately after doing so, they're pitching on to the public."

It was Dan Primack's article, Dividends For Us, Not For You in Fortune Magazine that first pointed this out and highlighted the nearly 50% increase in AutoTrader's long-term debt as well as the payout to pre-IPO shareholders including Cox Enterprises and two private equity investors, Providence Equity Partners and Kleiner, Perkins.

Nice.  Two words popped in my head after reading this article - douchebags and clawback.

Zune, Doom; Surface, Buried

Has the Brain Trust at Microsoft not used an iPad?  Why does Microsoft think it can improve or compete with the best consumer product since the iPod?  What a waste.  Microsoft's Zune could not keep up with the iPod, and Surface will never see the light of day against the iPad.  Microsoft needs to focus on creating apps for the iPad and Android tablets (for the six people that use one of those).

Reality Bites

I saw this InvestmentNews article over the weekend.  It was published on Tuesday, June 12, 2012.  The article starts with the following:

While a number of nontraded real estate investment trusts have recently posted sharp decreases in valuations, one of the largest, the $3 billion CNL Lifestyle Properties Inc., will steer clear of such results, according to its CEO, Stephen Mauldin.

“You have seen some disasters in the nontraded space,” he said after a presentation to investors Tuesday afternoon in New York. “We're not one of them.”

The article reported on CNL Lifestyle's CEO's presentation at a REIT conference.  I am not sure how CNL Lifestyle's CEO could make this claim without a third party value, especially since Lifestyle raised and invested capital during the real estate boom and has had issues with certain of its properties. 

On Thursday, June 14, CNL Lifestyle filed an 8-K, recanting its CEO's statements, the bulk of which is presented below:

In response to an article published on June 12, 2012 in Investment News commenting on the presentation given by CNL Lifestyle Properties, Inc. (the “Company”) at REITWEEK 2012, NAREIT’s Investor Forum, in New York, New York, the Company wishes to confirm that as previously reported in the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2012 (the “Form 10-Q”), it is in the process of engaging a third-party valuation consultant to assist in determining the per share value of the Company’s common stock and has not yet received any preliminary valuation information. As previously announced, on or prior to October 9, 2012 the Company will provide an estimate of its per share value to assist broker dealers seeking to comply with Financial Industry Regulatory Authority (“FINRA”) rules. Accordingly, the Company is unable to comment on the ultimate valuation of its common stock, of which the current third-party valuation exercise will be a part.

The Company also stated that no determinations had been made by its Board of Directors regarding any change in distributions or distribution policy and that the Board would consider the factors described in the Form 10-Q in making any determinations concerning future distributions and distribution policy.

Apparently, after the exuberance of speaking in front of an industry conference, someone went back and re-read Lifestyle's 2011 10-K and 2012's first quarter 10-Q and returned to reality. 

BDC Article

Here is a Reuters article on business development companies (BDCs).  The article was published in Buyouts Magazine, and is a good primer on BDCs.  Franklin Square's first BDC, FS Investment Corporation, recently finished raising $2.5 billion.  Other sponsors see the opportunity and are rushing in:

All told, more than a dozen nontraded BDCs have registered with the Securities and Exchange Commission over the last five years, according to Krus. Those identified as being aimed at retail investors and advised by buyout shops have raised or are seeking an estimated $8.6 billion.

For reasons I don't understand, new, non-traded BDCs have somehow become the domain of non-traded REIT sponsors.

The article talks about the front end fees of BDCs, which are identical on the BDCs I have reviewed.  One point to note is that non-traded BDCs' ongoing fees are the same as listed BDCs.

Update:  Here is another article on BDCs from Bloomberg.   Pension funds are looking to BDCs for their high yields.  

Sunday Night Reading

Daniel Yergin on America's new energy reality from the New York Times.  Here are some impressive statistics:

The natural gas market has been transformed by the rapid expansion of shale gas production. A dozen years ago, shale gas amounted to only about 2 percent of United States production. Today, it is 37 percent and rising. Natural gas is in such ample supply that its price has tanked. This unanticipated abundance has ignited a new political argument about liquefied natural gas — not about how much the United States will import but rather how much it should export.

The oil story is also being rewritten. Net petroleum imports have fallen from 60 percent of total consumption in 2005 to 42 percent today. Part of the reason is on the demand side. The improving gasoline efficiency of cars will eventually reduce oil demand by at least a couple of million barrels per day.

The other part is the supply side — the turnaround in United States oil production, which has risen 25 percent since 2008. It could increase by 600,000 barrels per day this year. The biggest part of the increase is coming from what has become the “new thing” in energy — tight oil. That is the term for oil produced from tight rock formations with the same technology used to produce shale gas.

Here is an important opinion piece from the Financial Times on the European debt crisis and includes some of the authors' recommended solutions.  Reluctant Germany is the key player to any long-term debt deal:

Until recently, the German position has been relentlessly negative on all such proposals. We understand German concerns about moral hazard. Putting German taxpayers’ money on the line will be hard to justify if meaningful reforms do not materialise on the periphery. But such reforms are bound to take time. Structural reform of the German labour market was hardly an overnight success. By contrast, the European banking crisis is a real hazard that could escalate in days.

Germans must understand that bank recapitalisation, European deposit insurance and debt mutualisation are not optional; they are essential to avoid an irreversible disintegration of Europe’s monetary union. If they are still not convinced, they must understand that the costs of a eurozone break-up would be astronomically high – for themselves as much as anyone.

After all, Germany’s prosperity is in large measure a consequence of monetary union. The euro has given German exporters a far more competitive exchange rate than the old Deutschmark would have. And the rest of the eurozone remains the destination for 42 per cent of German exports. Plunging half of that market into a new Depression can hardly be good for Germany.

 http://www.ft.com/cms/s/0/c49b69d8-b187-11e1-bbf9-00144feabdc0.html#ixzz1xSrW8L34

The Valuation's Too Damn High - Part III - Fool's Gold

This the third installment in my four-part The Valuation's Too Damn High series.  This post will focus on non-traded REITs that value their shares during their equity offerings.  This is fine on its face as it usually occurs in a REIT's third year of raising capital, but there is a disturbing twist - non-traded REITs that announce a new valuation can wait sixty days to adjust their share price.  For non-traded REITs that are adjusting their share price up, sixty days is a long marketing period to sell their shares at a "discount" to the new "value."  Two non-traded REITs, Dividend Capital Industrial Income Trust and Strategic Storage Trust (SST), have used their share reprice and 60-day marketing period to their benefit this year, substantially increasing their equity inflows.

Recently-moribund SST raised nearly $40 million in equity in May as the REIT prepared to re-price its shares from $10.00 to $10.79 on June 1, 2012.  SST sold its shares for $10.00 per share for the months of April and May, after announcing the pending, higher valuation in early April.  This manufactured share appreciation proved an effective marketing tool.  SST only raised $4.7 million of equity in March.  Sales jumped to $12.5 million in April after the new value was announced, and surged to nearly $40 million in May before the new price went into effect.

SST had its shares valued by an outside firm, Cushman & Wakefield.  Here is part of the valuation disclosure from SST's April 3, 2012, 8-K (my emphasis added):

Cushman & Wakefield has an internal Quality Control Oversight Program. This Program mandates a “second read” of all appraisals. Assignments prepared and signed solely by designated members (MAIs) are read by another MAI who is not participating in the assignment. Assignments prepared, in whole or in part, by non-designated appraisers require MAI participation, Quality Control Oversight, and signature. For this assignment, Quality Control Oversight was provided.

As described above, Cushman & Wakefield utilized the Income Capitalization Approach, which is a method of converting the anticipated economic benefits of owning property into a value through the capitalization process. The two most common methods of converting net income into value are direct capitalization and discounted cash flow. In the direct capitalization method, net operating income is divided by an overall capitalization rate to indicate an opinion of market value. In the discounted cash flow method, anticipated future cash flows and a reversionary value are discounted to an opinion of net present value at a chosen yield rate (internal rate of return). Cushman & Wakefield utilized the discounted cash flow method to determine the “as-is” value.

---

Cushman & Wakefield estimated the value of the Registrant’s real estate portfolio by using a 10-year discounted cash flow analysis. Cushman & Wakefield calculated the value of the Registrant’s real estate portfolio using cash flow estimates provided by the Advisor, terminal capitalization rates and discount rates that fall within ranges Cushman & Wakefield believes would be used by similar investors to value the properties the Registrant owns. The capitalization rates and discount rates were calculated utilizing methodologies that adjust for market specific information and national trends in self storage. The resulting capitalization rates were compared to historical average capitalization rate ranges that were obtained from third-party service providers. As a test of reasonableness, Cushman & Wakefield compared the metrics of the valuation of the Registrant’s portfolio to current market activity of self storage portfolios. Finally, due to the impact of financing in the current market, Cushman & Wakefield performed a leveraged analysis that is typical of the viewpoint of a portfolio buyer.

From inception through December 31, 2011, the Registrant had acquired 91 wholly-owned self storage properties for approximately $522 million, exclusive of acquisition fees and expenses. As of December 31, 2011, the estimated “as-is” value of the Registrant’s real estate portfolio using the valuation method described above was approximately $663 million. This represents a 27% increase in the value of the portfolio. The following summarizes the key assumptions that were used by Cushman & Wakefield in the discounted cash flow models to estimate the value of the Registrant’s real estate portfolio:

Terminal capitalization rate		7.0%
Discount rate		10.0%
Annual market rent growth rate		3.25%
Annual expense growth rate		3.0%
Holding Period		10 years

Cushman & Wakefield utilized the above terminal capitalization rate of 7.0% and discount rate of 10.0% in calculating the “as-is” value of the Registrant’s real estate portfolio and did not use a range or weighted average for these rates in the calculation. While the Registrant believes that Cushman & Wakefield’s assumptions and inputs are reasonable, a change in these assumptions and inputs would change the estimated value of its real estate.

Cushman & Wakefield, as part of its estimate, used cash flow estimates provided by SST's advisor.  The second bolded sentence reads to me as though Cushman Wakefield provided as one of its valuations for SST, a figure as if a buyer would acquire the entire company, which is a portfolio valuation, a methodology that would increase SST's final valuation figure, because a number of small properties as a group are worth more than if valued individually.  The table includes other assumptions, including rent growth that exceeds expense growth, which is not uncommon, but over ten years provides a growth in future projected net operating income on which to determine valuations.

I only excerpted part of the 8-K's discussion on how SST derived its valuation,  I'd encourage you to go read the entire April 3, 2012, 8-K.   I said in two previous posts on valuations - here and here - that the methodologies are not the problem, it's the inputs into the methodologies that can inflate values.  While SST was able to derive a $10.79 per share valuation, changing some of the inputs could have come up with values higher or lower than $10.79, and these figures would be just as valid (the 8-K discloses this).  I don't think SST would have raised $40 million in May if it had revalued at $8.50 per share, and if it had revalued at $11.50 per share, who knows how much equity it would have raised.

Earlier this year Dividend Capital's Industrial Income Trust used a similar strategy - revaluing its shares from $10.00 per share to $10.40 per share - and saw sales more than triple before the new higher share price went into effect.  After the new share price went into effect, Industrial Income Trust's sales dropped to $21 million in May, from $150 million in April.  That is a substantial drop.  Next up is SST, and it'll be interesting to see if it maintains its sales momentum in June, or reverts to the $3 million to $5 million per month it was raising before its share reprice. 

If a REIT on life support, like SST, can see sales jump nearly ten-fold, and Dividend Capital and see its Industrial Income Trust's sales jump from less than $50 million a month to more than $150 million a month all based on a new valuation, what's to stop other REITs from trying the same tactic.  REITs are allowed to reprice their shares and wait up to 60 days to implement the new share price.  Other non-traded REIT sponsors likely watched the jump in equity inflows at SST and Industrial Income Trust and must be thinking of following suit, and who could blame them.  When there's a gold rush, you better stake your claim.

Below are some examples of other REITs in their secondary offering period or near the end of their initial two-year offering period that I think would be candidates for a re-pricing:

• Corporate Property Associates 17
• Griffin Capital Net Lease
• Griffin-American Healthcare REIT II
• Inland Diversified REIT
• Hines Global REIT
• Lightstone Value Plus REIT II
• Paladin Realty Income Properties
• Philips Edison - ARC Shopping Center REIT
• United Development Funding IV
• Wells Core Office REIT

All these REITs could use a two-month shot of equity steroids.  It'd be hard to blame them if they chose to take the easy equity.  Even if a REIT experiences a large drop in sales after the new price is effective, like what happened with Industrial Income Trust, it's worth it to have the two month's sales frenzy.   Some broker / dealers don't seem to have any concerns about the strange, 60-day re-price window, as they, too, benefit from the short-term sales boost.  The third party valuation firms need to be careful, because they are being relied upon for the accuracy and credibility of their valuations.  Their valuations are considered sacrosanct in large part because they're third parties, but they need autonomy and should not just run computations based on data provided them by the REITs.  Garbage in, garbage out.  At some point, the REITs, their boards, the valuation firms, and possibly broker / dealers, are going to have to justify their processes, inputs and rationales.

This "value today, re-price in 60 days" strategy is going to attract regulators, which no one wants.  The non-traded REIT industry better police itself - fast.   Independent board members at REITs looking to revalue need to stand up to REIT management and turn the valuation process over completely to a third party valuation firm and accept the independent value without adjustment.    If a non-traded REIT gets a valuation that is higher - or God forbid lower, wait, that won't happen - than the current offer price, the shares should be repriced as soon as possible.  Non-traded REITs should not have a 60-day marketing period (not to mention the "whisper" period before the new valuation is announced) to sell into the new increased valuation that was based on a specific set of criteria that the REIT's management had input.  Better yet, if a REIT receives a share valuation higher than the current offer share price, and really wants to stand by the new valuation, the REIT's board should list the shares on an exchange and access the capital markets for future equity needs.

The whole valuation process reminds me of this Seinfeld clip:

 

Blast From The Past

One of my first jobs out of college was reviewing real estate deals that had imploded at the end of the 1980s and in the early 1990s.  One of the biggest real estate syndicators in the '80s was Chicago-based JMB, and one of its principals was Neil Bluhm.  Mr. Bluhm is now managing principal of Walton Street Capital, LLC, a Chicago-based private equity firm.  I saw this Bloomberg article over the weekend where Walton Street is about to lose a large portfolio of properties.  From the Bloomberg article:

Walton Street, whose managing principal is billionaire Neil Bluhm, bought the properties for $2.9 billion at the peak of the real estate market in 2007, Crain’s reported today. About $2.5 billion of loans on the Chicago-based firm’s portfolio come due June 8, and the properties are worth so much less than the debt that it makes sense to walk away, the newspaper said.

Blackstone Group LP (BX), the world’s largest private-equity firm, has acquired almost $600 million of debt on the buildings, putting it in a position to take control if the borrower defaults.

Here is another Bloomberg article on the transaction, as it looks like Blackstone is going to get the portfolio.

I like this quote that ends the first Bloomberg article:

The (Walton Street property) surrender comes just Walton Street is trying to raise $2 billion for its seventh and largest fund, Crain’s reported.  

It's a Wizard of Oz approach to raising capital, "Pay no attention to all the lost properties behind the curtain."   Mr. Bluhm didn't become a billionaire for lack of chutzpah.

Dull Week

This week stunk for any kind of comment-worthy news, or even creative thoughts on my part.  Healthcare Trust of America's (HTA) planned listing next Wednesday, June 6, 2012, will provide opportunity for commentary.  (Is it just me, or is there irony in HTA listing on D-Day?)