Wednesday, August 08, 2012

The View Through A Distorted Prism

Here is a must-read InvestmentNews article from last Friday, where Inland Group of Companies CEO Daniel Goodwin discussed Retail Properties of America's (RPAI) investor lawsuit, and its $254.4 million stock offering and listing from earlier this year.  Goodwin's audacity is hard to believe.  I've had to read this article several times, even cross-referencing it to RPAI's filings, to confirm just how obtuse he is.  The point I took from the article is that Inland is upset with RPAI for its low stock price and has not ruled out joining an investor lawsuit against RPAI. Here are a few paragraphs from the article, which I will address below:
In an interview Thursday, Mr. Goodwin was quick to note that Inland has no control over Retail Properties of America.

“Although we are shareholders, we have not managed the REIT for the past four-and-a-half years,” he said.
Inland owns about 2 million shares of the REIT through various businesses, Mr. Goodwin said.

Some members of Inland's board “disagreed with the timing and execution” of the initial public offering, he said.

“Those opinions were largely ignored,” Mr. Goodwin said.
When asked whether Inland would join the class action against Retail Properties of America, Mr. Goodwin said: “We have discussed various potential actions but haven't reached a conclusion. Our interests are clearly aligned with the shareholders.”
RPAI and Inland do have separate management.  In terms of control, Inland had a representative, Brenda G. Gujral, on RPAI's board until mid-May, so Goodwin's control comment only spans a couple of months.  Ms. Gujral is an executive officer of various Inland entities, and I have listed  below an excerpt from RPAI's 8-K disclosing Ms. Gujral's resignation from RPAI, which was after RPAI's listing (my emphasis added):
On May 14, 2012, Brenda G. Gujral resigned as a Director of Retail Properties of America, Inc. (the “Company”) effective on May 31, 2012. Ms. Gujral has confirmed to the Company’s Board of Directors that her resignation was not due to a disagreement with the Company on any matter relating to the Company’s operations, policies or practices
If you can believe the filing, it doesn't sound as though Ms. Gujral, and presumably Inland, had any issues with RPAI's listing back in May.   RPAI and Inland operate out of the same building.  It reminds me of a situation where an adult still lives at home with his or her parents.  (Inland Realty Corp (IRC), another Inland REIT that is listed on the NYSE, still offices at Inland's headquarter building, too.)  With RPAI's focus on retail properties and Inland's focus on retail properties, among other property types, it's disingenuous to think that in four years, two teams of executives acquiring, managing, leasing and financing similar properties and working in the same building operated in isolation, especially when one of the teams is due a big payday based on the other's performance.  If Inland joins the investor lawsuit, it should make for some tense trips in the elevator or maybe some road rage in the parking lot.

RPAI used $55 million of its $237 million net IPO proceeds to repay an affiliate of Inland Group.  In 2009 the affiliate made a $50 million investment into a joint venture between it and RPAI.  It's hard to imagine Inland whining about a receiving $55 million for its $50 million investment.  RPAI's IPO proceeds were smaller than anticipated ($254 million compared to an estimated of $350 million), and the amount of IPO proceeds that went to pay down its underwriters' affiliates' debt was less than originally anticipated.  Inland didn't take a discount and received a repayment of its 2009 joint venture investment in full, plus an extra $5 million.

Inland's $50 million joint venture investment in 2009 probably allowed RPAI to refinance $625 million of debt.*  You can't be revisionist in 2012 and question this deal because the credit markets were non-existent in 2009, and it's to Inland's and RPAI's credit that they were able to complete the refinance in the middle of the credit crisis.  I find it incredulous that Goodwin is complaining about an IPO after proceeds from it repaid Inland its joint venture investment plus 10%.  I'm sure RPAI shareholders would jump at the chance for the same return on investment.

In the article Goodwin states that Inland only owns 2 million shares of RPAI stock.  In a blog post earlier this year, I noted that as part of its 2007 internalization, RPAI acquired its former advisor, an affiliate of Inland.  RPAI paid for its advisor with 11.4 million in split-adjusted shares.  I'm not sure what to make of Goodwin's comment that Inland only owns 2 million shares.  If Inland really only owns 2 million shares, I'd like to know what happened to the other 9.4 million shares.

Inland's internalization fee is now worth $114 million, based on the 11.4 million shares and yesterday's closing price of $10.00 per share.  Is Goodwin's complaint about the listing really a complaint about the low list price, which resulted in Inland's internalization fee not being large enough?  (Originally, the internalization fee, based on RPAI's $10.00 offer price, was $375 million.  This was later reduced to $285 million after a lawsuit.)

I fail to see how Inland's interest is aligned with investors.  RPAI gave paid Inland its internationalization fee in stock at a price determined by Inland.  Investors had to pay cash for their shares.   Inland was well-paid throughout the time it managed RPAI.  The internalization fee was a gift, not a performance fee earned for providing a specified return to investors.   I don't feel any sympathy for a gripe about shares not paid for that have dropped in value from $285 million to $114 million.

RPAI's initial public offering was at $8.00 per share, which was well below estimates of $10 to $12 per share.   It's stock closed yesterday at $10.00, up nearly 20% since its listing (while the IPO was at $8.00, RPAI began trading around $8.50 per share).  As far as I know, Inland's shares are subject to the same multi-staged listing as other RPAI shareholders.  Investors in RPAI's original offering have still lost nearly 60% in share price value, but Inland is still $114 million ahead.

* From RPAI's March 12, 2012's S-11:  "In addition, in 2009, in connection with a $625 million debt refinancing transaction, we raised additional capital of $50 million from an affiliate of the Inland Group in exchange for a 23% noncontrolling interest in a newly formed joint venture to which we contributed 55 of our properties."

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