Confluene of Crap

This blog has tracked UDF IV's lack of financial statements, which culminated in yesterday's de-listing announcement for UDF IV due to its inability to file financial statements.  Well, UDF IV is not the only non-traded REIT with a failure to file financial statements problem.  A small public REIT, First Capital Real Estate Trust, which was formerly United Realty Trust, has not filed financial statements since the 2015 second quarter 10-Q.  In September 2015, United Realty's former sponsor, advisor, property manager, and principal entered into a sales agreement with First Capital Real Estate Investments, LLC, in a deal that provided cash and a consulting contract to United Realty's former principal.  The REIT changed its advisor and changed its name to First Capital Real Estate Trust.

In October of 2015, First Capital Real Estate Trust fired its auditor, Ernst & Young, and has not filed an 8-K disclosing a replacement auditor.  The REIT has not filed any financial statements since the transaction with First Capital, and it has been through three CFOs since August 2015, with the last leaving in early April of this year.

There is much more related to First Capital Real Estate Trust.  Take thirty minutes to read through First Capital's public flings for the past year to get your Halloween fright.  You'll need to reference United Realty's 2014 10-K to partially grasp, or at least put in some jaw-dropping context, what the heck First Capital did in September with its Brooklyn, New York, Tilden Avenue property. 

Here is another Halloween scare:  I read a "due diligence" report, dated late August 2016, on First Capital Real Estate Investment's new private debt offering that failed to mention any of the issues at the REIT.  Maybe it is just me, but I'd think any broker dealer reading a "due diligence" report would find it material that an affiliated flagship REIT had no auditor, had no CFO while churning through three CFOs in less than a year, and had not filed any financial statements since 2Q 2015.  Thanks for the heads-up, Bozo. 

Did Not See That Coming

UDF IV missed its Tuesday (October 17, 2016) deadline to file its financial statements to avoid Nasdaq de-listing, and Nasdaq notified UDF IV that it will de-list UDF IV's shares.  In a press release yesterday, October 18, 2016, UDF IV gave no specifics on when it plans to release its updated financial statements.  In addition, UDF IV notified investors that the SEC provided a Wells Notice to the REIT and certain individuals associated with the REIT, where the U.S. Securities and Exchange Commission's ("SEC") Division of Enforcement made a preliminary determination to recommend that the SEC file an enforcement action alleging violations of certain provision of the Securities Act of 1933 and the Securities Exchange Act of 1934.

The SEC's allegations were not released.  None of this news comes as a big surprise.  It is an understatement to say this is a serious situation. 

High Rent Blight

Here are several articles and blog posts on high rent blight (here, here, here, and here).  High rent blight is when landlords in fancy or trendy areas increase rents to a level where many businesses can no longer afford stay in their current location.  Businesses that face large rent increases must choose to move to cheaper parts of town or close entirely.  The landlord then elects to keep a space vacant for an extended period until it can find a tenant willing to pay the rent, leading to prolonged periods of empty retail space in otherwise vibrant neighborhoods.

I have noticed this high rent blight, but did not know it was a real issue or had a name.  I wondered why there was so much vacant space in places like SoHo, La Jolla, Beverly Hills and West Los Angeles (I noticed this on S. Robertson Blvd.), and San Francisco.  Initially, I thought the vacancies were a leading indicator of an economic slowdown, but it is actually revealing the opposite.  I know there is more to high rent blight than greedy landlords or landlords playing a tax game, and one blanket term does not apply to all buildings.  But it does make walking around high rent blighted neighborhoods feel disconcerting, it is as if they are downtrodden for some unknown reason. 

Landlords should be careful.  Trends move fast and people do not linger on a half empty street, especially if an open door way becomes a permanent homeless shelter.

Speed Bump

In a filing late Friday afternoon, UDF IV disclosed that it has asked the Nasdaq Panel for an extension to avoid delisting.  Nasdaq had given UDF until September 12, 2016, to file its 2015 audited financial statements along with 2016's first and second quarter financial statements, which I noted here.  According to Friday's statement, UDF IV's auditor needs more time to finish its work.  I do not think this is good news for UDF IV.

UDF IV's entire statement is below, with bold added to the section pertaining to the extension request:

GRAPEVINE, Texas, August 26, 2016 – As previously announced, United Development Funding IV  (“UDF IV” or the “Trust”) (NASDAQ: UDF) has not filed with the U.S. Securities and Exchange Commission (the “SEC”) its Annual Report on Form 10-K for the fiscal year ended December 31, 2015 or its Quarterly Report on Form 10-Q for the first quarter of fiscal 2016. The Trust also has not filed its Quarterly Report on Form 10-Q for the quarter ended June 30, 2016. Nasdaq Listing Rule 5250(c)(1) requires the timely filing of periodic reports with the SEC, and therefore, pursuant to the procedures of the Listing Qualifications Department of The NASDAQ Stock Market LLC (“Nasdaq”), the Trust received formal notice from the staff of the Listing Qualifications Department, announced herein pursuant to Nasdaq Listing Rule 5810(b), indicating that because the Trust failed to timely file its Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, the Nasdaq Hearings Panel (the “Nasdaq Panel”) will consider the additional deficiency in connection with the Trust’s request for the continued listing of its securities on Nasdaq.

As previously announced, UDF IV attended a hearing before the Nasdaq Panel, which subsequently granted the Trust’s request for continued listing on Nasdaq, subject to the Trust evidencing compliance with Nasdaq Listing Rule 5250(c)(1) and with all other applicable requirements for continued listing on Nasdaq by September 12, 2016.

The Trust engaged auditors on June 8, 2016, and the audit process began immediately. After recent conversations with its new auditors regarding the expected filing date for its Annual Report on Form 10-K for the fiscal year ended December 31, 2015 and the Quarterly Reports on Form 10-Q for the quarters ended March 31, 2016 and June 30, 2016, respectively (the “Filings”), the Trust notified the Nasdaq Panel that it would need additional time to file all Filings simultaneously. Therefore, the Trust will submit a written request to the Nasdaq Panel for an extension of the September 12, 2016 filing deadline.

Trading in UDF IV’s securities on Nasdaq has been halted since February 18, 2016, and the Trust expects that the trading halt will continue at least until the Trust has become fully current in its periodic filing obligations with the SEC. No assurance can be given regarding the resumption of regular trading of the Trust’s securities on any market.

Head Scratcher

I do not understand why New York REIT, Inc. (NYRT) is planning to liquidate.  NYRT is a former non-traded REIT that listed on the New York Stock Exchange in April 2014.  It is associated through management with AR Global.  NYRT has been battling outside institutional investors that opposed NYRT's planned merger with JBG Companies and certain of JBG Companies' private funds.  The merger was cancelled in early August. 

So the JBG Company merger did not happen and NYRT decides its only option is to sell all its properties?  NYRT's second quarter 10-Q states the REIT has $2 billion in assets and nineteen properties.  This Bloomberg article reports on institutional investor skepticism about the planned liquidation, including from WW Investors, the firm that helped end NYRT's merger with JBG Companies.   The asset sale and liquidation plan, like the JBG Companies merger, faces outside resistance as noted by this quote from the Bloomberg article:

Sheila McGrath, an analyst at Evercore ISI, said the New York-based company had better options than the liquidation and that a new board of directors must be installed immediately.

“This is the same board that approved the JBG merger transaction at a significant cost to shareholders,” McGrath wrote in a research note Monday. “The one thing that most institutional investors that we have spoken to support is the recasting of the NYRT board as soon as possible prior to making any final strategic decision.”

 There is plenty of drama yet to come for NYRT.

Crazy Stuff

This is wild story on Bloomberg.  The SEC today suspended a $35 billion company based in Northern Baja California.  Neuromama's stock was halted until August 26 “because of concerns regarding the accuracy and adequacy of information in the marketplace about, among other things, the identity of the persons in control of the company’s operations and management, false statements to company shareholders and/or potential investors that the company has an application pending for listing on the NASDAQ Stock Market, and potentially manipulative transactions in the company’s stock.”

Neuromama's stock has quadrupled so far in 2016 despite not having filed filed financial statements since 2013, and then it had no revenue.  This section gives no comfort:

Steven Zubkis, who also goes by Steven Schwartzbard, is the marketer behind Neuromama, according to the company’s website. He left prison in August 2010 after being sentenced for five years for defrauding investors, in a $1.8 million scheme through misrepresentations tied to the renovation of a Las Vegas casino. The Ukrainian immigrant was sued by the SEC in the 1990s for orchestrating a $12 million penny stock scam. He was ordered to pay more than $21.6 million in disgorgement and penalties for selling unregistered securities from 1993 to 1996.

In what business does a company named Neuromama operate?  The Bloomberg article states that it "operates in a broad range of businesses: a search engine, licensing “heavy ion fusion technology patents,” and Cirque-du-Soleil-style performances in Tijuana, to name just a few."  Well, that explains things.

Blackstone's Non-Traded REIT

Here is a Bloomberg article on Blackstone's new $5 billion non-traded REIT - $4 billion initial offering with $1 billion of distribution reinvestment - which was filed last week with the SEC.  The article states that the new REIT will address transparency issues that have plagued other non-traded REITs.  The article does not state how the Blackstone non-traded REIT is more transparent than other non-traded REITs.  Unsubstantiated comments like this annoy me.  Most non-traded REITs have decent transparency, you just have to take the time to read filings.  I am not sure what Blackstone plans to disclose that other REITs do not.

The Bloomberg article has a positive quote from a Green Street Advisors managing director:

“Historically, the fee load has been pretty significant for retail investors to get into these vehicles,” said Dirk Aulabaugh, a managing director in the advisory and consulting unit of Green Street Advisors LLC, a Newport Beach, California-based real estate research firm. Blackstone’s new fund appears to be “better aligned than what has historically been the case in the nontraded REIT space, and I think investors are going to welcome that, and they’ll be successful in raising capital along those lines.”

Like the transparency issue, the article implies through the quote above that the Blackstone non-traded REIT has a better fee structure than other non-traded REITs, but it offers no specific comparisons.  I guess I am going to have to read through the dang filing to find out for myself.

D'oh!

A DI Wire headline today states that "MVP REIT Reports 94 Percent Increase In Year-Over-Year Revenues."  Amazing! Stupendous! Fantastic! Misleading!  The REIT was raising and investing money over this period, so a 94% revenue increase needs more context.  A REIT raising equity and borrowing money to buy properties better be increasing revenue. Year-over-year financial performance for any investment in the midst of raising and investing capital is non-comparable.

Let's take a look at some of MVP REIT's other year-over-year financial points of interest from the same financial statement along with sample headlines:

• Assets increased 59% from $81 million to $129 million.  "MVP REIT's Total Asset Skyrocket 59%"
• Debt increased 75% from $25 million to $44 million.  "Burdened:  MVP REIT's Debt Leaps 75%"
• MVP's Net Loss for the six months ended June 30, 2016 was ($2,131,000) compared to a Net loss of ($1,572,000) for the six months ended June 30, 2015, a drop of 39%.  "Oops, MVP REIT's Net Loss Moves In Wrong Direction, Dropping 39%"
• MVP's Cash From Operations for the six months ended June 30, 2016 was ($1,159,000) compared to Cash From Operations of ($1,347,000) for the six months ended June 30, 2015, an improvement of 14%.  "MVP REIT Slows Hemorrhage of Operating Cash"

All the headlines are right, and all are misleading.  Only when MVP REIT has several quarters of fully invested operations will period-over-period comparisons be relevant.  One point that is true about MVP REIT, and that is not obfuscation, is that it is a small REIT.  It only raised $97 million in equity in its offering and has $129 million in total assets.

Looking Through The Rearview Mirror

I read last week that FINRA has launched an investigation into non-traded business development companies (BDCs).  FINRA is late to this issue, like about three years too late.  Non-traded BDC sales are down a staggering 63% through the first seven months of 2016 compared to the same period in 2015.  The drop can be attributed, in part, to the closing of Franklin Square's FSIC III and CNL's Corporate Capital Trust, two of the top selling non-traded BDCs, and the tepid reception of their respective follow-on offerings.  The decline in sales is also related to the lower NAVs reported by many BDCs over the past year and a half, which served to spook clients and financial advisors.  Non-traded BDCs are required to value their portfolios quarterly, or more frequently if their NAVs move outside pricing bands, and non-traded BDCs have shown they are not immune to market forces.

The drop in oil prices that started in the second half of 2014 was felt across high yield markets, and therefore by non-traded BDCs.  The oil and gas sector is heavily represented in the high yield debt sector, and the graph I presented my previous post illustrates how correlated oil prices and the high yield markets were until earlier this year.

BDCs are a structure, not an asset class.  Most non-BDCs operate in the large non-bank financing market, primarily making a variety of loans to small and medium sized companies.  Companies that borrow from BDCs and other non-bank lenders are generally growing companies that do not have banking relationships or cannot get bank financing, and therefore do not have investment grade credit ratings, if they have a rating at all.  This is a high yield market and comes with all the risk of high yield investing.

I have seen various numbers related to the size of the non-bank capital market, but the smallest figure I have seen is $1 trillion and the largest over $50 trillion.  This is a legitimate market that is not going away anytime soon.  Non-traded BDCs are a small part of this huge market.

Oil and High Yield Debt

Here is a good Bloomberg article on the rebound in high yield debt and the oil markets.  For much of the past year and a half the price of oil and high yield debt have moved together.  The latest drop in oil prices has been a solo move, as high yield debt has not followed the oil market down.  The following chart from the article shows the performance of oil and high yield debt since the start of 2015:

High yield debt market moved with oil because so many recent issuers of high yield debt were oil and gas companies.   A May 31, 2016, report by the law firm Haynes & Booth states that there have been 81 oil and gas bankruptcies since the start of 2015.

The Bloomberg article takes a closer examination of the high yield debt and oil markets.  When just the high yield debt of energy companies is compared to the price of oil, the performance is strikingly similar.  While the overall high yield market may have separated from oil, energy high yield debt is following the price of oil down.

Update:  As of August 3, 2016, the number of oil and gas bankruptcies since the start of 2015 is now up to 85.

Posting Again

It is time to start reposting.  I never formally stopped writing this blog so I am not formally restarting it.  There is a mealy-mouthed cop-out if ever there was one.

The primary reason I decided to restart posting is the DI Wire.  I have been getting its daily updates on the Direct Investment (DI) industry for a year or more and still have not figured out its mission.  Is it news?  Paid advertisement?  A mixture of both?  The best I can figure the DI Wire is mostly the PR Wire.  The tipping point for me was earlier week when a headline announced that Benefit Street was to acquire Business Development Corporation of America (BDCA).  Wrong.  As subsidiary of Benefit Street is acquiring BDCA's advisor from AR Global, and it is not acquiring BDCA.  The headline, which has not been corrected, implied a liquidity event for BDCA investors.  Wrong.  BDCA investors will have a new investment manager, not liquidity.  Big, big difference.

Of course I will continue to read the DI Wire, I love to read stories about direct investment sponsors hiring wholesalers or random acquisitions in line with investment objectives.

The Clock Is Ticking...

On July 25, 2016, UDF IV received written notice from Nasdaq Hearings Panel that Nasdaq Global Select Market will continue to list UDF IV stock.  UDF IV's stock is currently halted.  The Nasdaq decision is contingent upon UDF IV meeting certain listing requirements, in particular it has to file with the SEC 2016's first and second quarter financial statements and 2015's audited financial statements by September 12, 2016.

UDF IV's auditor resigned last November.  A new auditor, EisnerAmper, LLP, was announced on June 8, 2016, which was good news for the mortgage REIT.  The new auditor is presumably working to complete UDF IV's financial statements before the September deadline.  I expect ugly results when and if UDF IV's stock is allowed to resume trading as investors will rush to exit.  Audited financial statements or not, UDF IV remains under investigation by the FBI and SEC and is in default on a term loan that had $28.5 million outstanding as of May 23, 2016.  The following passage from UDF IV's 8-K filing describing the default shows the level of financial restrictions it faces as a result of the default:

The Trust (UDF IV) is required to use a portion of its future available cash flow to pay transaction expenses, interest due under the Loan, and principal. The Trust has agreed to provide certain financial reporting to the Lenders and it has agreed to suspend distributions to its shareholders during the Forbearance Period. The Trust also agreed not to originate new mortgage loans, incur additional debt, grant additional or substitute collateral to any other lender, or dispose of assets without first obtaining the consent of the Lenders.

 I want UDF IV to resolve its issues.  Its financial statements are at the top of my summer reading list.