Friday, March 27, 2015


The lazy reporting on non-traded REITs is getting tedious.  Few journalists that write articles about non-traded REITs fully understand them, and it shows.  The latest installment is from the March 24, 2015, Wall Street Journal, in an article titled "Property Investors' Latest Horror: Zombie REITs."  The article focuses on two pre-crash REITs, and not all the liquidity events over the past two years.  The article's focus was Inland American and CNL Lifestyle, two REITs I have recently posted about.  There is no way to spin the poor performance of these two REITs, but they are not the entire market, and their struggles are not new news. 

The article states that the value of Inland American's holdings has plunged 60%.  Wrong.  This is based on the $10.00 per share price that investors paid for their shares and the recently announced $4.00 per share value.  The difference between the original $10.00 per share and current estimate of $4.00 per share is indeed 60%, but it excludes the value of the Xenia Hotels & Resorts (XHR) spin-off that all Inland American investors received.  I figure the listing of XHR was worth approximately $2.80 per share to Inland American investors, or 28% or their original investment (and XHR stock has gone up since its listing).  The article mentions XHR, but not the amount returned to investors.  The amount investors received in XHR needs to be added to Inland American's remaining value.  Inland American still has its issues and investors are still at a loss, but the XHR listing was a major event.

The article further states (my emphasis):
Fundraising by nontraded REITs has now cooled. The funds pulled in about $15 billion in 2014, down by a quarter from 2013, in part because the funds returned just $12.9 billion of investors’ original capital last year, down from $17.2 billion in the previous year.
My own research showed $13.5 billion of original equity experienced liquidity events in 2014, not $12.9 billion.  If you use the WSJ numbers, in two years there was over $30 billion of liquidity.  If you look back at the lack of liquidity in the '80s, '90s, and '00s, $30 billion of capital returned to investors in a two-year span is stunning.

(There is more than a small irony that the article complains about 2014's drop in fund raising for non-traded REITs due to the decline in liquidity events.  Selling a REIT upon its liquidity event to reinvest in another non-traded REIT is a story in itself and a bigger industry-wide issue than two well-known, struggling REITs.)

Journalists and business publications have to get better covering and understanding non-traded REITs (and their sort of brethren business development companies).  These investments have raised billions since 2008, and to sound alarms and recyle old themes without addressing current issues is not helping investors.  The only thing missing from this article was as a Leo Wells reference.

Tuesday, March 24, 2015

Return for Risk?

As a follow-up to my post yesterday about interval funds, I encourage you to click through to view the portfolio for Ladenburg Thalmann's Alternative Strategies Fund (LTAFX).  When you finish picking up your jaw, click here to see LTAFX's returns and determine for yourself whether investors have been properly compensated (through high returns) given the risk of some of the interval fund's holdings. 

Oil Storage Problem

Bloomberg has an article and animated video on its website that present a scenario where oil could go to $20 a barrel or lower if oil storage reaches capacity.  The article is full of hypothetical situations, but it reinforces my feeling that no one knows where the price of oil is headed.

Monday, March 23, 2015

High Priced Mediocracy

Interval funds - generally, continuously offered closed-end funds - give investors a chance to invest in multiple alternative investments they may not otherwise qualify for directly.  I am specifically discussing interval funds that focus on acquiring interests in business development companies, public REITs, private REITs, private equity real estate funds, private placements, and public, non-traded REITs.  These interval funds are similar to mutual funds, so suitability requirements are much lower than a direct investment into one of the non-traded investments owned by the interval fund. 

My knocks on interval funds are fees and performance.  Interval funds are funds-of-funds.  This means there are two layers of fees - one at the interval fund level and one at the underlying investment fund level.  The combined annual expenses can run three percent to five percent of total assets, which is a big hurdle for asset classes and investments - real estate and business development companies - that are historically income oriented, not growth focused.  Funds-of-funds will have average performance, as top performing funds' results are offset by the results from poor performing funds.  Over the long-term, for most investors, I don't believe the portfolio benefits of an interval fund - diversification and lower volatility - outweigh the performance issue, which is inherent because of interval funds' structures, and diminished further by their high fees.

Thursday, March 19, 2015

Growing Glut

I am fascinated by the drop in oil prices.  No one predicted the price drop of the past six months.  No one knows if oil prices are going to $80 a barrel or $20 a barrel.  (There are guesses at both ends of the spectrum, so some analyst will be able to claim prescience.)  The attached Bloomberg article and the chart below are from last week but give an indication of where prices are likely to go, at least in the near term.

Friday, March 13, 2015

Bad Guess

Last week I guessed at a price of $6.50 per share for CNL Lifestyle's new net asset value.  I was not close, not even in the same county close.  In an 8-K filing on March 10, 2015, CNL Lifestyle disclosed a new NAV estimate of $5.20 per share, down 24% from the $6.85 per share estimate at the end of 2013.  Read the 8-K, the candor of certain statements is jarring, like the following passages that help explain why the REIT's NAV dropped from $6.85 per share to $5.20 in one year:
Based on discussions between Jefferies and more than 150 potential buyers over the course of the last year, the Company has determined that the value of its assets is lower than the NAV per share of common stock as of December 31, 2013 (the “2013 NAV”). This price discovery data was not available in prior valuations and represents the most significant factor in the decrease of the 2014 NAV from the 2013 NAV. 
Another factor driving the reduction of the 2014 NAV was portfolio performance that, in certain instances, did not meet the Company’s, its operators’ or CBRE’s forecasts. 
CNL Lifestyle's investment banker, Jefferies, shopped the REIT and its assets to more than 150 potential buyers and was told that the $6.86 per share price was too high ("price discovery").  In addition, the assumptions (i.e. net operating income, cap rates, etc.) the REIT used to determine value in early 2014 were too optimistic.  This REIT purchased plenty of niche assets during a real estate boom, so you can't play revisionist today, but a near halving of value is still ugly.

Thursday, March 05, 2015

Wrong On Many Levels

I am hearing some crazy things about American Realty Capital Properties (ARCP), Cole, and RCS Capital (RCAP).  The rumors and finger pointing are flying around so fast someone is going to lose an eye.  Then I read a blog post on an advisor rumor website (I am not going to link to it) that is so wrong it would be laughable if it was not scary.  The post is essentially long quotes from several broker dealer analysts upset by changes at Cole Capital.  The problem is that the article flips back-and-forth, confusing ARCP, which owns Cole Capital, and RCAP, which owns broker dealers and distributes AR Capital-sponsored alternative investments, and treats the two companies as one entity.  If we have learned anything over the past four months it is that ARCP (and Cole) and RCAP are separate companies.  If you are going to spread rumors, at least get the companies straight.

Tuesday, March 03, 2015

Head's Up

CNL Lifestyle REIT announced (warned) today that it is disclosing its net asset value per share on March 10, 2014.  I can hardly wait.  Lifestyle's NAV last year was $6.85 per share.  In 2014, Lifestyle sold its golf properties and used most of the proceeds to pay off mortgage debt related to the golf properties and pay down the REIT's line of credit.  Lifestyle has not returned any capital to investors from property sales.  Lifestyle is still planning on completing its liquidation by December 31, 2015, according to its third quarter 2014 10-Q.  At what share price do we set the over/under for the new NAV?   I'll guess $6.50 per share.

Monday, March 02, 2015

The Wait Is Finally Over

American Realty Capital Properties, Inc. (ARCP) filed its restated financial statements this morning, which stem from the October 29, 2014, disclosure of accounting errors .  The restatement includes the first two quarters of 2014, and full years 2013, 2012, and 2011.  According to this Bloomberg article, which quotes a JP Morgan analyst, it does not appear that any bigger issues emerged from the restatements.  The specter of some undisclosed issue at ARCP was the concern of most people who follow the non-traded REIT industry.  The restatement did result in ARCP reporting an increased loss and lower adjusted funds from operations for 2013.