Thursday, June 28, 2012

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.

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