Tuesday, August 30, 2016

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.

Tuesday, August 23, 2016

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.

Monday, August 15, 2016

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.

Friday, August 12, 2016


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.

Thursday, August 11, 2016

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.

Wednesday, August 03, 2016

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.