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. 


Ockham said...

Now there is also the First Capital Real Estate and Photomedex transaction.


First Capital's bankers and lawyers must be quite busy.

Rational Realist said...

Thanks for the tip. Another non-cash transaction. First Capital trades land for shares in a penny stock. I am not sure of the mechanics of this trade because First Capital is transferring land it is valuing at $10 million for PhotoMedex (PHMD) stock, but Photomedex only has a market cap of $6.5 million.

Ockham said...

Thank you for all the great work you do on this blog.

PMDX basically got rid of all its business assets in 2016 and early 2017, so the transaction structure looks like a bit like a reverse merger. Suneet is taking over as CEO of PMDX post transaction.

Shareholders in the NT REIT will receive distributions of PMDX stock.

This is all assuming the transaction gets approved by PMDX shareholders. Large portion of shares have already agreed to vote to approve.