Friday, April 26, 2013

Errors and Generalizations

I don't know what to make of Seeking Alpha.  Some of its article seem well researched, but others just make me shake my head.  This article from a week ago on the non-traded REIT industry has me discounting everything on Seeking Alpha.  I am not going to fisk the entire article, but it had way too many errors and generalizations for me to take seriously as either opinion or research.

The first paragraph jumps right in with generalizations and bad information:
Many of these currently non-traded companies will either list, or merge with listed REITs and those who have a head start on the analysis will be positioned to take advantage. There were 2 examples of such activity in very recent REIT history that show the importance of knowing about these non-traded REITs: American Realty Capital Properties' (ARCP) purchase of ARCT3 and Spirit Realty's (SRC) acquisition of CCPT2. In both cases, the mergers proved successful and the stocks have performed exceptionally well as a result.
Many "currently non-traded companies will either, list or merge with listed REITs."  Really? When?  The mergers and listings of non-traded REITs has been sporadic over an extended period, and it's dangerous to extrapolate AR Capital's recent liquidity activity to the entire non-traded REIT market.  Second, the Spirit / Cole Credit Property Trust II (CCPT II) merger is not even complete.  Spirit's stock has had strong performance since the REIT's announced merger with CCPT II, but the deal won't be complete until the third quarter.

The article's author says to look for a non-traded REIT that defers all its front-end fees for two years:
Consider avoiding companies which take their fees upfront. When only $0.90 out of every dollar gets invested, it can be very difficult to get above water. I will illustrate this concept by example.

Two companies, A and B each charge 10% distributed between salaries, commissions and fees. Company A structures their compensation upfront, while company B defers the charges for 2 years. Imagine that each company has a very strong acquisition pipeline such that they can invest at a 10% cap rate.

Company A takes its fee and invests 90% of the initial capital which is worth around 109% after 2 years. Company B invests 100% of the initial capital which is worth 121% after 2 years at which point it takes its fee leaving 111% for the investors. Despite taking a fee of precisely equal magnitude and the companies making the same caliber of acquisitions, those who invested in the company with deferred fees made 22.2% more profit.
Guess what, the non-traded REIT that defers its fees for two years doesn't exist, has never existed and never will exist.  It's ridiculous and disingenuous to even speculate - let alone offer a comparison - about a product that has never existed.  Maybe the author should start a deferred load REIT.  He'll learn fast how much money can be raised when brokers find out they have to wait two years to get their commissions.

The author states unequivocally to avoid American Realty Capital Trust V because of a "resource allocation" problem:
The parent company, ARC, has a new offering out called ARCT 5. This, in my opinion, has terrible resource allocation. It is going back to the triple-net single tenant retail space, but not opportunistically. In addition to the smaller spreads, it creates an active competition for properties between it and ARCP which are run by the same management team. Competing against itself and getting diminished margins is not desirable resource allocation.
What?  American Realty Capital Trust V (ARCT V) just opened and is starting to raise capital.  It has no meaningful "resources," so it can't have a resource allocation problem.  The article presents no data so substantiate the "smaller spreads" statement.  The "smaller spread" comment impacts all net lease REITs, so if the author believes his comments he should be selling all net lease REITs, not just a REIT that has no meaningful assets.  Both AR Capital and Cole have stated (through their affiliated REITs) in recent public filings that they are finding net lease investment opportunities at cap rates well above 7%.

The author stated that he went to the REISA conference last week - and probably suffered through multiple mindless panels - so I suspect he had to write something to justify his trip.   He should have stuck to some basic facts rather than make bold, but groundless and erroneous pronouncements.  But I guess no one would want to read that blog post.


Anonymous said...

Well done. I'll give you the same treatment he gave me: "If you are bringing these technicalities up in the spirit of accuracy, I applaud your effort, but we must not focus on irrelevant details over the concept."

Anonymous said...

Seeking Alpha is a blog after all,with all that goes with it.I saw an entry recently on an SC bank that seemed a little sophmorish.I then realized that the author was a Furmam University undergrad who my daughter was acquainted with,and was actually a Junior.Go figure!

Rational Realist said...

Anon 1, yes, never let facts get get in the way of a good story.

Anon 2, even though Seeking Alpha is a blog, it still should have some level of standard to present factual information. I can handle opinions, I expect them from a blog, but opinions aren't worth much when supporting facts are wrong or based on fictional scenarios.