Thursday, November 29, 2012
Twinkie Brain
The executives at Hostess have been eating too many Twinkies and Ding-Dongs. The sugar-brained executives had the nerve to ask the bankruptcy court for permission to pay themselves $1.8 million in bonuses or the executives won't stay on through Hostess's bankruptcy liquidation. They bankrupt a company, ruin an iconic American brand, and cost 18,000 people their jobs right before the Holidays, then want a bonus for this stellar performance. Really? Where's the accountability? Don't let the door hit their fat Ho-Ho asses on the way out. Pay them in stale Little Debbie's instead.
Getting Ready to Wait
Cole Credit Property Trust II (CCPT II), in response to its now
year-and-a-half-old liquidity event proclamation, disclosed in an 8-K earlier
this month that "numerous potential bidders" are looking at all or part
of the REIT. The 8-K also said that Cole has asked the bidders to
submit any offers by the end of November, which is fast approaching. I,
for one, am not delaying Holiday shopping plans waiting around to analyze an
early-, mid-, late- or post-December 8-K filing detailing a liquidity event for CCPT II. I'll believe it when I see it.
Is it me or is the "or part" language interesting? Except as I discuss below, I'm skeptical that Cole would sell CCPT II in three parts - single tenant retail, multi-tenant retail and office and industrial. CCPT II's prior disclosures have mentioned partial sales before, but this is the first time three distinct portfolio sectors have been identified. A partial sale would be messy and time consuming. The second best scenario for Cole is an all-cash sale where it can try get as much money as possible recycled into its two current non-traded REITs. In my opinion, the best option for investors is one where they receive full, immediate liquidity - none of this staged, multi-period listing nonsense - while keeping the option to continue receiving a high distribution.
I have stated before that I think Cole will try and pull a WP Carey and provide liquidity to investors while keeping control of CCPT II's assets. Slicing the portfolio into thirds makes this hypothesis / guess less a stretch. Cole's Corporate Income Trust can buy the office assets while Cole Credit Property Trust IV buys the retail assets. This is the best scenario for Cole. Heads Cole wins, tails Cole wins.
A commenter in my last post on CCPT II stated correctly that in a complete asset sale Cole would not have to internalize its advisor. While true, I don't see Cole, or any non-traded REIT sponsor that hasn't waived an internalization fee, selling a portfolio without negotiating some form of liquidation payday, whether through internalization or some other form. Cole didn't hire two investment bankers for nothing.
Is it me or is the "or part" language interesting? Except as I discuss below, I'm skeptical that Cole would sell CCPT II in three parts - single tenant retail, multi-tenant retail and office and industrial. CCPT II's prior disclosures have mentioned partial sales before, but this is the first time three distinct portfolio sectors have been identified. A partial sale would be messy and time consuming. The second best scenario for Cole is an all-cash sale where it can try get as much money as possible recycled into its two current non-traded REITs. In my opinion, the best option for investors is one where they receive full, immediate liquidity - none of this staged, multi-period listing nonsense - while keeping the option to continue receiving a high distribution.
I have stated before that I think Cole will try and pull a WP Carey and provide liquidity to investors while keeping control of CCPT II's assets. Slicing the portfolio into thirds makes this hypothesis / guess less a stretch. Cole's Corporate Income Trust can buy the office assets while Cole Credit Property Trust IV buys the retail assets. This is the best scenario for Cole. Heads Cole wins, tails Cole wins.
A commenter in my last post on CCPT II stated correctly that in a complete asset sale Cole would not have to internalize its advisor. While true, I don't see Cole, or any non-traded REIT sponsor that hasn't waived an internalization fee, selling a portfolio without negotiating some form of liquidation payday, whether through internalization or some other form. Cole didn't hire two investment bankers for nothing.
Tuesday, November 27, 2012
Archstone's Cobbled Road
The Archstone saga has been strange. For months last year and into this year, bankrupt Lehman battled Equity Residential in bankruptcy count for control of Archstone, a large apartment owner and operator. (Lehman bought Archstone near the end of the credit crisis.) Lehman finally won control of Archstone and planned an IPO of Archstone stock to raise cash to repay creditors. The IPO process started last summer. Yesterday, it was announced (via Bloomberg) that old nemesis Equity Residential, along with AvalonBay - the two largest listed apartment REITs - are buying Archstone for $6.5 billion. Lehman's creditors get $2.45 billion of the $6.5 billion.
From reading the article, I figure Lehman's value for Archstone was $5.66 billion when it finally won control earlier this year. Archstone's $6.5 billion price tag is a solid premium for Lehman, especially since the prospects of the IPO were not assured, but it was a tough road.
From reading the article, I figure Lehman's value for Archstone was $5.66 billion when it finally won control earlier this year. Archstone's $6.5 billion price tag is a solid premium for Lehman, especially since the prospects of the IPO were not assured, but it was a tough road.
Thursday, November 08, 2012
Good News / Bad News?
I try to stay away from politics on this blog, but one thing I noticed after Tuesday's election was how wrong some of the professional pundits were in their pre-election predictions. If so many pundits can make shot-in-the-dark guesses why can't I? I can't help but wonder whether Cole Credit Property Trust III's successful sale of the Microsoft Property is good news before some unpleasant news on Cole Credit Property Trust II's (CCPT II) pending liquidation. CCPT II announced in the summer of 2011 that it would seek a liquidity event within twelve months. This date came and went with no announcement.
In late August 2012, CCPT II filed an 8-K announcing that it had hired two investment bankers. This was good news, and a step forward towards liquidation, but there is still no news on an exit strategy nearly three months later. I won't believe Cole is serious about liquidity until it waives any internalization fees. Wells REIT II waived internalization fees earlier this year, and KBS REIT II waived internalization fees this fall. These were significant developments for the non-traded REIT industry, and a continued referendum on the stigma of internalization fees. The longer Cole is quiet on this huge potential payday, the less convinced I am that Cole is serious about CCPT II liquidity or foregoing an egregious internalization fee.
There is another factor that I'm sure plays against the liquidity and internalization fee waiver: the increasing deficit between CCPT II's 8.0% preferred return and its 6.25% current distribution. This figure grows daily, diminishing Cole's chances of sharing in liquidation profits. I am going to get wonky, but follow the premise. CCPT II is paying a 6.25% distribution, and its annual preferred return, or hurdle rate, is 8.0% per year. When the REIT provides investors a return of capital and an 8.0% per year return, its advisor shares in 10% of all additional proceeds. (The 10.0% incentive amount is less than many other non-traded REITs.) Any annual shortfall essentially gets added to the initial share price, increasing the price needed before Cole is paid its incentive fee. The current annual difference for CCPT II is $.175 per share per year ($.80 perferred return, less $.625 current distribution). CCPT II has never paid a distribution equal to its preferred return, so the annual deficit has been added to the initial share price since the initial distribution in late 2005.
The longer Cole waits the bigger the hurdle becomes. I figure the approximate accumulated difference at $1.0625 per share, through September 2012. This requires any liquidation event price to exceed $11.0625 before Cole begins to share in its 10% incentive fee. (I'm sure CCPT II's investment bankers have spent considerable time figuring the exact share price where CCPT II's advisor starts to receive its incentive.) I am not going to predict a liquidation value for CCPT II, I'll let the market determine that, but I will state that the longer CCPT II waits to liquidate the more the deficit grows. Time is not Cole's friend.
(CCPT II pays its advisor an asset management fee of .25% of its aggregate asset value, which is low compared to many other REITs, and not in my opinion, a strong financial incentive to delay a liquidation.)
This brings us back to the internalization fee. This is a big potential payday, which can run into the tens to hundreds of millions of dollars, especially for a REIT the size of CCPT II. If Cole thinks an incentive fee is out of reach, an internalization fee looks all the more enticing. Wells REIT II has a similar dynamic, maybe more so than CCPT II - a long-term deficit between its distribution and its preferred return - and it waived its internalization fee. It was the right decision, and it met industry expectations.
Political pundits are in a safe bubble and none have any repercussions - the networks will keep calling no matter how wrong their predictions. I hope Cole isn't in a delusional bubble where it believes it can slip a large internalization fee past investors. That would be bad for Cole and bad for the industry. Cole needs to build on the success of its Microsoft Property transaction, not ruin it with bad news on CCPT II's liquidation. Unlike the political pundits, I hope I'm wrong.
In late August 2012, CCPT II filed an 8-K announcing that it had hired two investment bankers. This was good news, and a step forward towards liquidation, but there is still no news on an exit strategy nearly three months later. I won't believe Cole is serious about liquidity until it waives any internalization fees. Wells REIT II waived internalization fees earlier this year, and KBS REIT II waived internalization fees this fall. These were significant developments for the non-traded REIT industry, and a continued referendum on the stigma of internalization fees. The longer Cole is quiet on this huge potential payday, the less convinced I am that Cole is serious about CCPT II liquidity or foregoing an egregious internalization fee.
There is another factor that I'm sure plays against the liquidity and internalization fee waiver: the increasing deficit between CCPT II's 8.0% preferred return and its 6.25% current distribution. This figure grows daily, diminishing Cole's chances of sharing in liquidation profits. I am going to get wonky, but follow the premise. CCPT II is paying a 6.25% distribution, and its annual preferred return, or hurdle rate, is 8.0% per year. When the REIT provides investors a return of capital and an 8.0% per year return, its advisor shares in 10% of all additional proceeds. (The 10.0% incentive amount is less than many other non-traded REITs.) Any annual shortfall essentially gets added to the initial share price, increasing the price needed before Cole is paid its incentive fee. The current annual difference for CCPT II is $.175 per share per year ($.80 perferred return, less $.625 current distribution). CCPT II has never paid a distribution equal to its preferred return, so the annual deficit has been added to the initial share price since the initial distribution in late 2005.
The longer Cole waits the bigger the hurdle becomes. I figure the approximate accumulated difference at $1.0625 per share, through September 2012. This requires any liquidation event price to exceed $11.0625 before Cole begins to share in its 10% incentive fee. (I'm sure CCPT II's investment bankers have spent considerable time figuring the exact share price where CCPT II's advisor starts to receive its incentive.) I am not going to predict a liquidation value for CCPT II, I'll let the market determine that, but I will state that the longer CCPT II waits to liquidate the more the deficit grows. Time is not Cole's friend.
(CCPT II pays its advisor an asset management fee of .25% of its aggregate asset value, which is low compared to many other REITs, and not in my opinion, a strong financial incentive to delay a liquidation.)
This brings us back to the internalization fee. This is a big potential payday, which can run into the tens to hundreds of millions of dollars, especially for a REIT the size of CCPT II. If Cole thinks an incentive fee is out of reach, an internalization fee looks all the more enticing. Wells REIT II has a similar dynamic, maybe more so than CCPT II - a long-term deficit between its distribution and its preferred return - and it waived its internalization fee. It was the right decision, and it met industry expectations.
Political pundits are in a safe bubble and none have any repercussions - the networks will keep calling no matter how wrong their predictions. I hope Cole isn't in a delusional bubble where it believes it can slip a large internalization fee past investors. That would be bad for Cole and bad for the industry. Cole needs to build on the success of its Microsoft Property transaction, not ruin it with bad news on CCPT II's liquidation. Unlike the political pundits, I hope I'm wrong.
Tuesday, November 06, 2012
The Acquisition
Non-traded real estate investment trusts buy and sell (mostly buy) properites every day, and no one transaction seems more memorable than any other. But then in the summer of 2010 Cole Credit Property Trust III (CCPT III) purchased a $310 million office building, and it instantly became an acquisition everyone was talking about. The building, located in a suburb of Seattle, was over 95% leased to Microsoft, and I know it as the Microsoft Property. Cole has been justifying the acquisition of the Microsoft Property ever since.
Other non-traded REIT sponsors whispered that they too had reviewed the property, but had passed on it because it was too expensive, giving a strong implication that Cole overpaid. Cole was accused of style drift - what else could it be if a retail-oriented REIT spent so much money on a single office property? You must be ever-vigilant for the horror of style drift in the strict, stratified world of non-traded REITs.
CCPT III has sold the most infamous property in recent non-traded REIT history, giving Cole some justification and vindication. The Microsoft Property, which was purchased for $310 million, was sold for $375 million. Cole's spite at the industry seeped into its press release (emphasis added):
On a serious note, CCPT III paid a pre-payment penalty of $12.8 million as part of the Microsoft Property sale. The property had a $156 million mortgage that was repaid at closing. I figure the pre-payment penalty was 8.2% of the outstanding balance on the mortgage. Is is me or does this seem like a high percentage?
Other non-traded REIT sponsors whispered that they too had reviewed the property, but had passed on it because it was too expensive, giving a strong implication that Cole overpaid. Cole was accused of style drift - what else could it be if a retail-oriented REIT spent so much money on a single office property? You must be ever-vigilant for the horror of style drift in the strict, stratified world of non-traded REITs.
CCPT III has sold the most infamous property in recent non-traded REIT history, giving Cole some justification and vindication. The Microsoft Property, which was purchased for $310 million, was sold for $375 million. Cole's spite at the industry seeped into its press release (emphasis added):
Now that the Microsoft Property has been sold, the industry can focus its full attention on the ever-pending liquidity options for Cole Credit Property Trust II.“When our experienced real estate team brought this opportunity to us in the summer of 2010, despite industry naysayers, we felt this acquisition would be an excellent fit for our growing portfolio of mission-critical corporate properties,” said Marc Nemer, Cole’s president and chief executive officer. “Today, not only have we seen a 21% increase in the property's value, but we were able to deliver a return of 38% on the equity invested, creating significant value in the portfolio for the benefit of our shareholders.”
On a serious note, CCPT III paid a pre-payment penalty of $12.8 million as part of the Microsoft Property sale. The property had a $156 million mortgage that was repaid at closing. I figure the pre-payment penalty was 8.2% of the outstanding balance on the mortgage. Is is me or does this seem like a high percentage?
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