Friday, December 28, 2012

Lifestyles Of The Rich And Famous

Northstar's CEO and Chairman, David Hamamoto has sold his Fifth Avenue co-op apartment in Manhattan for $50 million, the price he was asking. 

Tuesday, December 18, 2012

Big Merger

American Realty Property Trust III, Inc. (ARC III) agreed on Friday, December 14, 2012, to merge with NASDAQ-listed American Realty Capital Properties (ARCP).  The $3 billion ARC III / ARCP combination provides investors' two liquidity options.  Investors can choose to receive cash of $12.00 per share, or shares in the merged company with a value of $12.26 per share (based on ARCP's $12.90 stock price at the time of the announcement multiplied by 95%).  The transaction is expected to close in the second quarter of 2013.

ARCP disclosed a planned post-merger distribution of $.90 per share.  To current ARC III investors, this is the equivalent to a yield of 8.66%, or a jump of over 31% from ARC III's 6.60% yield. (It's an approximate yield of 7% to investors buying ARCP stock today.)

ARCP and ARC III have similar management and are affiliated with AR Capital, the sponsor of multiple non-traded REITs.  In reading the filing information, ARC III and ARCP had separate investment bankers and only the independent directors of each company voted on with merger, with the AR Capital-affiliated directors that sit on both companies' boards - Nicholas Schorsch and Michael Weil - abstaining from the merger vote.  The following is from the investor letter describing the transaction's advisors:
BofA Merrill Lynch is acting as exclusive financial advisor and Duane Morris LLP is acting as special legal counsel to ARCP in connection with the transaction. UBS Investment Bank is acting as exclusive financial advisor and Weil, Gotshal & Manges LLP is acting as special legal counsel to ARCT III in connection with the transaction. Proskauer Rose LLP is acting as corporate counsel to ARCP and ARCT III.
This is not the first affiliated transaction in the non-traded REIT industry.  WP Carey has been merging its offerings for years, with its most recent merger completing this fall.  ARCP is already a listed company and the market doesn't hide its opinion of deals it doesn't like.  ARCP's stock is holding steady after the announcement.

The merger produced a mountain of paperwork which needs analysis.  My initial thoughts are that investors have two options, both of which are attractive as of today.

AR Capital continues to press the industry with the speed to liquidity and return to investors of its ARC Trust REITs.  Liquidity and exit strategies, once nebulous events dismissed as future possibilities, are now critical when talking about non-traded REITs. 

Thursday, December 13, 2012

What's The Opposite of Accretive?

De-cretive? Di-lutive?  Di-sappointing?  None a pretty word.  I posted Tuesday about Cole Credit Property Trust II's suspension of its distribution reinvestment plan and its share repurchase plan.  I speculated that the suspension of the two plans could be the initial steps toward CCPT II's liquidation.  Another idea floated through my brain after re-reading CCPT II's lawyerly disclaimer sentence in CCPT II's investor letter (emphasis added):
While no final decisions have been made, CCPT II anticipates being in a position to announce further updates regarding a potential liquidity event in the near future
What if all the entities supposedly looking at CCPT II were proposing values below its current distribution reinvestment price of $9.35 per share, and share repurchase price of $9.31 per share? If this is the case, the board's decision to suspend the distribution reinvestment program and share repurchase program makes sense and doesn't necessarily signal an imminent liquidity event.

Buying shares back at prices higher than the shares' value is bad business, the board cannot knowingly overpay for assets.  On the other hand, if the estimates of share value were higher than the share repurchase and reinvestment price, it'd be in CCPT II's shareholders' best interest to buy as many shares as possible at the undervalued price.  CCPT II's redemption requests have exceeded actual redemptions:
During the nine months ended September 30, 2012, we received valid redemption requests pursuant to the share redemption program, as amended, relating to approximately 15.2 million shares, including those requests unfulfilled and resubmitted from a previous period, and requests relating to approximately 4.6 million shares were redeemed for $43.2 million at an average price of $9.31 per share. The remaining redemption requests relating to approximately 10.6 million shares went unfulfilled, including those requests unfulfilled and resubmitted from a previous period. Requests for redemptions that are not fulfilled in a period may be resubmitted by stockholders in a subsequent period.
I reviewed redemption requests for both Dividend Capital's Diversified Property Fund (DPF) and CNL Lifestyle, both of which raised equity capital in the mid-2000s.  Like CCPT II, both redeem far fewer shares than requested.   But both REITs increased redemptions after recent revaluations revealed a lower net asset value per share than the previous redemption price.  DPF redeemed 1% of its shares in the second quarter, but redeemed 25% of requests in the third quarter after it lowered the value of its shares.   Lifestyle, after its August revaluation, increased the amount of shares it was willing to redeem per quarter.  The implication to me is that both DPF's and Lifestyle's boards were hesitant to repurchase too many over shares at prices greater than what the boards believed the respective REIT's actual net asset value.  There are many reasons for a non-traded REIT to limit redemptions and buying shares back at prices higher than a REIT's asset value is but one. 

I guess we'll know shortly whether CCPT II's board's decision to suspend CCPT II's distribution reinvestment and share repurchase plans were a precursor to a sale or an act of fiscal prudence.

Tuesday, December 11, 2012

Initial Steps

Cole Credit Property Trust II filed an 8-K this morning announcing that the REIT has suspended its distribution reinvestment program and its share repurchase program.  The 8-K included a letter to investors stating that "while no final decisions have been made, CCPT II anticipates being in a position to announce further updates regarding a potential liquidity event in the near future." 

Suspension of share repurchase and distribution reinvestment plans are generally some of the first steps by a non-traded REIT preparing for liquidity. 

Lodging Regains Pre-Recession Levels

I meant to post this Calculated Risk link yesterday.   Hotel occupancy rates are now at their best levels since late 2007, or before the credit crisis and recession. RevPAR (revenue per available room), one of the key hotel operating metrics, increased 6.2% over the past year.  The chart below from Calculated Risk presents occupancy information for various periods. 

Friday, December 07, 2012

Houston, We Don't Have A Problem

Here is a comprehensive article from the New York Times (via on the national apartment market.  It's full of information and worth reading.  The authors are amazed that even Houston is seeing strong demand for multifamily units.  The article ends on this high note:
Andy McCulloch, the head of residential research at Green Street Advisors, a real estate analysis firm, said it was a misconception that growing momentum in the single-family housing market would hurt the rental market.
“If the single-family market gets better it could help jobs, it could help incomes and you could see rent continue to rise,” he said. Constraints on lending, Mr. McCulloch said, will also keep a lid on the number of new homeowners.

“If I was an apartment landlord, the only thing that would really freak me out from the buying side is the return of easy credit,” he said. “But that doesn’t seem to be coming back anytime soon.”

Wednesday, December 05, 2012

Fresh & Awful

Here is a Bloomberg article on British retailer Tesco's plans to leave the US market through the sale or closure of its Fresh & Easy grocery stores.  There is a Fresh & Easy store near my house and it's a horrible shopping experience.  It has limited inventory (part of Fresh & Easy's concept) and its non-house brand inventory is expensive.  I never shop at Fresh & Easy for more than a handful of items, usually food and grocery basics, but it never fails that Fresh & Easy is out of stock or does not carry one or more of things I went in to buy.  I don't like to see stores fail, but the Fresh & Easy concept has been a missed opportunity from the start.

Legacy Non-Traded REIT Breaks Even

Last week, an affiliate of Blackstone Group agreed to buy David Lerner & Associates' Apple REIT Six for $11.10 per share, through a combination of cash and preferred shares in the Blackstone entity.  According to InvestmentNews, Apple REIT Six raised its capital from 2004 to 2006 at a price of $11.00 per share.  Not knowing anything about this deal, but considering it was offered before the credit crisis and invested in hotels, one of the hardest hit asset classes, giving investors a breakeven price seems like a good deal to me.

Tuesday, December 04, 2012

OMG - It's A Frenzy!

Housing mania has returned.  The grip to buy is immediate and tightening.  Here is a Bloomberg article from last week about the frenzy in Las Vegas, where the housing supply is about 1.5 months, which is low.   Foreclosures have disappeared and people are rushing back to the market.  My own anecdotal example is of an acquaintance who bought an approximate 800 square foot condo for over $600K - sight unseeen - so not to miss the opportunity.  Peoples' memories are short.  Everyone needs to take a deep breath, step back, and tell themselves they aren't going to miss any opportunities in the home price rebound.  It's been seven years since the housing market peaked and it's not going to regain all its lost ground in a few weeks. 

If A Fee Falls In A Forest

AR Capital has made a subtle change to the compensation structure of its non-traded REITs.  Rather than take an asset management fee in cash, it has opted to take the asset management fee in units of the operating partnerships through which the non-traded REITs own and operate their real estate.  AR Capital has subordinated receipt of this fee to investors receiving a return of capital, plus a specified annual return, generally 6%, resulting from a liquidity event.  So, before AR Capital gets its asset management fee, it must return an investor's original investment, plus 6% per year.  Payment of the asset management fee is therefore not assured.  This is separate from any other incentive compensation AR Capital may earn from its REITs.

Asset management fees provide sponsors with steady, recurring revenue, which is not based on any performance or return to investor hurdles.  The asset management fee, because of its predictability, is a disincentive for sponsors to provide liquidity to investors, especially if liquidation incentive fees appear unobtainable. Over time, the asset management can become the only compensation a sponsor is ever going to receive.  When a non-traded REIT lists to go public, one of the first changes is elimination of the asset management fee, which tells you all you need to know about the validity of this fee.

I have not read of or heard of any other sponsor following AR Capital's lead.  Frankly, I'll be surprised if other non-traded REIT sponsors emulate the ARC fee change, even though they should.  Until investors, brokers and broker / dealers cry about this fee, or start making investment decisions contingent on this fee, sponsors will let AR Capital defer its fees while they keep collecting the asset management fee.   Because the asset management fee is generally stated in small percentage amounts - 1% or .75% of asset value, for example - its insidious impact - particularly over the long-term - is overlooked. It locks investors into a REIT because sponsors have no incentive to provide liquidity and stop receipt of the asset management fee.

While the above is all good and well, if AR Capital's focus is to get its REITs' equity raised and invested, and then provide REIT investors liquidity through a sale or listing, why not eliminate the asset management fee altogether?    If AR Capital eliminates asset management fees, its competitors will feel the pressure from broker / dealers to cut or eliminate asset management fees.  Investors will be the real beneficiaries of lower fees.

Monday, December 03, 2012

That's Alotta Money

Here is a slide from a Northstar Realty Finance Corp (NRF) presentation to a securities conference last summer:

NRF sponsors the Northstar Real Estate Income Trust, a non-traded mortgage REIT.  Interesting to see how much money a sponsor expects to make from its non-traded REIT.  NRF, according to the footnotes, expects to earn 3% per year on equity capital from asset management, origination, acquisition and disposition fees.  I don't see any expectations for potential incentive fees.  Wait, there is no incentive when the sponsor is earning 3% per year!

The slide above is public information and was extracted from an 8-K that NRF filed with the SEC on September 5, 2012.   You can search NRF's filings to see the entire presentation.