Thursday, August 02, 2012

Internalization Fee Rises Like A Phoenix

No sooner had I declared the internalization fee dead, than it appears that I proclaimed its death too soon.  TNP Strategic Retail Trust filed an 8-K today disclosing that it has amended its advisory agreement between the REIT and its external advisor.  According to the 8-K, the amended advisory agreement will:
Delete in its entirety Section 13 of the Advisory Agreement, which provided, among other things, that before the Company could complete a business combination with the Advisor to become self-administered, certain conditions would have to be satisfied, including (i) the formation of a special committee comprised entirely of the Company’s independent directors, (ii) the receipt of an opinion from a qualified investment banking firm concluding that consideration to be paid to acquire the Advisor was financially fair to the Company’s stockholders and (iii) the approval of the business combination by the Company’s stockholders entitled to vote thereon in accordance with the Company’s charter.
The way I read the above passage is that the REIT's safeguards related to the REIT acquiring its advisor are being removed, which would make charging an internalization fee much easier.  (It would also make the internalization process much faster as a committee, third party report and shareholder vote are being eliminated.)  Remember, an internalization fee is the price that a REIT pays to acquire its external advisor, and this price has historically been paid in REIT stock.  TNP Strategic Retail has not disclosed a management internalization or the cost of an internalization (internalization fee), and the deleted sections from the advisory agreement would not have prevented an internalization fee, but it's apparent to me that some of the REIT's investor protection provisions have been removed.  

The 8-K also disclosed that the REIT's Chief Financial Officer has resigned.  The entire 8-K is worth reading.

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