Monday, April 24, 2017

Yanking The Deal

I read in this morning's DI Wire that Resource Real Estate is suspending its Resource Innovation Office REIT, and will restructure it as a Net Asset Value REIT.  The REIT had raised less than $5 million in the nearly two years since it was declared effective, so I am guessing that tweaking the fee structure is not going to suddenly make this REIT attractive to broker dealers and investors.  Resource America, the parent of Resource Realty, was purchased by C-III Capital Partners, a large real estate investment firm, in deal that closed in early September of last year.  

I don't know C-III's plan for the Resource non-traded REITs, but I think broker dealers and investors would like to see an investment offering C-III's real estate expertise.  Trying to push legacy Resource deals in a tough environment is not working.  C-III has controlled Resource for eight months and its time put its institutional real estate expertise and its balance sheet to work attracting retail investors. 

Thursday, April 20, 2017


Yesterday's DI Wire was full of press release reprints.  I noted one in my previous post, and here is another on First Capital Realty Trust hiring a new CFO.  I have lost track of how many CFOs this firm has had since new management took over in September 2015, but I am running out fingers to count them.  First Capital still has not filed any financial statements since the second quarter of 2015.  I don't see working with outside auditors as a job description when I read the duties of the new CFO: "overseeing all aspects of the finance function, including capital market activities, financial reporting, accounting, tax and internal audit." This new guy will last until he realizes he is getting paid in Operating Partnership units.

The DI Wire story also noted First Capital's big transaction in Sacramento, California, called Township Nine, and how it is working on a strategic transaction with Presidential Realty Corporation.  The story omitted that the mortgage securing Township Nine is in default and how resolving this debt supersedes any activity on the property.  Oops.  I wrote about the Township Nine mess here

The good news is that there are still third party "due diligence" firms writing reports on this outfit.  I bet they are not getting paid in OP Units.

Mystery Solved

Strategic Storage Growth Trust Inc. raised over $93.5 million in equity in the last month of its offering.  The March equity inflow represented nearly 41% of all the equity the REIT received in its entire offering period, which was over two years, and the REIT's last three months of equity inflows totaled a staggering 57% of its equity.  A non-traded REIT, long into a previously weak offering, does not experience big inflows without a reason.  

Yesterday, I believe I learned the reason.  The DI Wire reported (OK, mostly reprinted Strategic Storage's press release) that Strategic Storage Growth Trust had announced a Net Asset Value per share of $11.56 per share.  All the new money - $131.5 million in the first three months of 2017 -  that went into the REIT at $10.05 per share, now have a new value of $11.56 per share.  Nice!  

I suspect Strategic Storage was whispering about the higher pending valuation and that resulted in the huge money inflow.  This strategy has been used before by Strategic Storage and other sponsors to raise big money over the short period between when they receive the new valuation and when they announce the new revaluation.  It is a good story: market a non-traded REIT at price per share that the sponsor knows for sure is going to show a much higher value in a matter of weeks, and then sponsor and financial advisor look like geniuses and new investors are happy.    If something works, stick with it.  But remember, you can't spend a valuation increase in a non-traded security.

Tuesday, April 18, 2017

Retail Tipping Point and Wider Impact

Here is a New York Times article from over the weekend on the impact of store closings.  The article is broad in its scope.  There are so many factors impacting retail that it is hard to point to one dominant cause for retail's problems.  E-commerce is surely a factor and the improvements to delivery will drive its growth.  Still, trying clothes on before purchase is not going to go away.  Buying online on spec and hoping clothes fit gets old fast with the hassle of returns. But something big is happening, especially since the overall economy is still growing.
Store closures, meanwhile, are on pace this year to eclipse the number of stores that closed in the depths of the Great Recession of 2008. Back then Americans, mired in foreclosures and investment losses, retrenched away from buying stuff.

The current torrent of closures comes as consumer confidence is strong and unemployment is low, suggesting that a permanent restructuring is underway, rather than a dip in the normal business cycle. In short, traditional retail may never recover.
A strong real estate market is not helping retailers.  As landlords push rents they are forcing retailers to close, and apparently, it is not just the small, local retailers, as evidenced by empty stores on 5th Avenue, Beverly Hills, and SoHo.  I noted this urban high rent blight here

I repeat this passage in the middle of the New York Times article without much comment because of its severity:
Between 2010 and 2014, e-commerce grew by an average of $30 billion annually. Over the past three years, average annual growth has increased to $40 billion.

“That is the tipping point, right there,” said Barbara Denham, a senior economist at Reis, a real estate data and analytics firm. “It’s like the Doppler effect. The change is coming at you so fast, it feels like it is accelerating.”

This transformation is hollowing out suburban shopping malls, bankrupting longtime brands and leading to staggering job losses.

More workers in general merchandise stores have been laid off since October, about 89,000 Americans. That is more than all of the people employed in the United States coal industry, which President Trump championed during the campaign as a prime example of the workers who have been left behind in the economic recovery.

The job losses in retail could have unexpected social and political consequences, as huge numbers of low-wage retail employees become economically unhinged, just as manufacturing workers did in recent decades. About one out of every 10 Americans works in retail.
I think it's time to start start re-purposing or razing real estate.

Thursday, April 13, 2017

Another Reason Altnertative Sales Are Down?

Last weekend, I read this article on the Above The Market blog describing various financial advisor personality types.  In short, these personality types base their investment recommendations on alternatives to evidence-based investing.   The article's examples include fear-based advisors, intuitive-based advisors, and self-righteous-based advisors.  The advisor type that is hurting alternative sales is the ideology-based advisor.  These advisors believe that when an opposing political party is in office the stock market is bad and hard assets are where to invest, and when their political party is in power the stock market is where to invest.  The investment recommendations are based on political beliefs, not solid investment research. 

The New York Times had an article on how even economic data is now partisan.  It appears that the partisan divide is getting worse.  The following is from the article:
Since Donald J. Trump’s victory in November, consumer sentiment has diverged in an unprecedented way, with Republicans convinced that a boom is at hand, and Democrats foreseeing an imminent recession.

“We’ve never recorded this before,” said Richard Curtin, who directs the University of Michigan’s monthly survey of consumer sentiment. Although the outlook has occasionally varied by political party since the survey began in 1946, “the partisan divide has never had as large an impact on consumers’ economic expectations,” he said.
This is scary from an investor standpoint, as even hard data is being skewed or interpreted through a partisan filter.  Anecdotally, based on my interaction with financial advisors that favor alternative investments, many fall on the right side of the political spectrum, some to the right of right.  This political outlook, coming after the credit crisis and recession of 2008 and 2009 and the election of a Democratic president, I believe, led many advisors to recommend the perceived safety of hard assets and helped the sale of non-traded securities.  This world view is now bringing money back to the stock market.  (Poorly designed T Shares are hurting sales, too.)

Advisors and investors need to start looking at evidence and make decisions based on sound, unbiased data, not a gut feel, or a pundit's opinion on Fox News, or MSNBC.   I'll be the first to admit that the political channels and websites are entertaining these days, but take your investment advice from the business pages, not the editorial pages.  Markets and investments are politically unbiased, and they perform independent of what ever party is charge.  Policies may help specific investments, like how easy lending standards boosted home prices in the 2000s, but over the long term, markets react to underlying economic principals, not politics.

Friday, April 07, 2017

Corporate Captial Trust Explores Liquidity

Corporate Capital Trust, the $2.8 billion CNL/KKR business development corporation, released a filing on Wednesday stating that its board has approved a plan for the BDC to seek liquidity within the year through a listing on an exchange.   As part of the liquidity, KKR will move from a sub-advisor role to advisor, replacing CNL in this capacity.  CNL will have representation on a special advisory committee that will be formed upon liquidity. 

Of course, seeking liquidity is not assured liquidity.  This seems like positive news for the non-traded alternative industry.

Thursday, April 06, 2017

More Malls

Here is a Washington Post article on the troubles facing malls and retailers.  This passage is a great summary of the current retail environment:
The retrenchment comes as shoppers move online and begin to embrace smaller, niche merchants. As a result, many major chains now find themselves victims of a problem of their own making, having elbowed their way into so many locations that the nation now has more retail square footage per capita than any other. To use the industry vernacular, they are simply “overstored.”
You can add "overleveraged' to overstored to describe the trouble facing many retailers.  I think I am part or the problem because I seek out and shop at "smaller, niche merchants."  It is time to start razing malls and building housing.

Tuesday, April 04, 2017

Zero + Zero = Zero (And a Loss of Dignity)

The I received an email yesterday announcing the acquisition of Freedom Capital Investment Management by First Capital Real Estate Investments.  The merger to end all mergers - a fringe non-traded REIT sponsor buys an aborted business development company.  First Capital, whose flagship public REIT has not filed a financial statement since the second quarter of 2015, is apparently taking over a BDC that never raised any money.  What can go wrong?

Freedom Capital was formed in June 2014 and its escrow agent finally terminated the escrow agreement at the end of 2016 because the BDC could not raise any money.   In typical First Capital fashion, its acquisition of Freedom Capital involves no cash, but a secured promissory note payable over time.   Hey, Freedom Capital guys, good luck getting any money.  But really, is a BDC that never raised any money worth more than a "payable over time promissory note?"

What broker dealers are lining up to offer shares in this can't miss cesspool?  Somehow - and the most shocking revelation in the March 30, 2017, supplement that announced the Freedom Capital acquisition - the new First Capital Investment Corporation has $6,130,000 in investor capital.  I wonder where this money came from?

And Dr. Robert Froehlich, you earned some fame last year when you resigned as an independent director from two AR Global REITs and publicly blasted AR Global's conflicts of interest, but what the heck are you doing entangling yourself with these numbskulls?  I get it that you miss the independent director compensation, but this outfit is a dignity black hole.  You can't get it back.  Did you bother to look at the BDC's portfolio?  Its only investment is a loan to an affiliated company, First Capital Retail, LLC.  I'll spell it out and underline it for you in case you forgot: C-O-N-F-L-I-C-T O-F I-N-T-E-R-E-S-T!!   The affiliated loan is $1,500,000 at LIBOR plus 9%, and is due March 31, 2018.  I would not be surprised if this affiliated loan pays no current interest but has all interest due at maturity.  BDCs are regulated companies and have strict prohibitions about investing in affiliated transactions.  Dr Bob, you are a conflicts of interest magnet.

Garbage like this is why I get up in the morning. 

Retail's Preppy PE Blues

Here is a Bloomberg article that was sent to me on the departure of J. Crew's long-time creative director.  I don't care too much about the fashion loss, but these two paragraphs jumped out at me:
The change brings fresh upheaval to a chain suffering from sputtering sales, heavy debt and a broader shift away from mall-based retail. Same-store sales -- a key measure -- fell 7 percent last year and 8 percent in 2015. The company also has been hobbled by borrowing tied to its 2011 purchase by TPG Capital and Leonard Green & Partners LP.

J. Crew, led by Chief Executive Officer Mickey Drexler, has been trying to turn around its operations by closing stores, cutting costs and streamlining its inventory. The efforts have helped reduce red ink: The company posted net income of $1.1 million in its most recently reported quarter, compared with a loss of $7 million a year earlier.
I italicized the sentence above.  Add J. Crew to the list of retailers potentially ruined by private equity firms.  Mickey Drexler is a retail veteran, which is positive for J. Crew, but the private equity debt expense makes his job tougher.  The fashion industry is difficult enough with changing consumer trends and tastes, without adding the noose of private equity instituted debt.  Of course, the private equity principals paid themselves from the borrowings that now threaten J. Crew, so they don't care.