KBS Ditches BDs

The DI Wire reports that KBS is closing its flatlined non-traded REIT, KBS Growth & Income REIT, Inc., effective June 30, 2017.  This REIT raised $5.4 million since its inception in April 2016.  This is a horrible capital raise effort even in a tough DOL dominated market.  I am not optimistic about the REIT's plan to continue to raise capital through an on-line private offering.  KBS Growth & Income is returning to investors the difference between the price investors paid for their shares and the pending NAV price per share, which is the offering load, unless there is some aggressive valuation math.  This is a positive move by the REIT, but at $5.4 million of total capital, KBS should just return all investor money and start fresh.

Commenting in hindsight is easy, but looking back, KBS really should have listed or sold the $1.8 billion in equity KBS REIT II outright in 2014 rather than liquidating the portfolio asset by asset.  KBS REIT still owns eleven properties four years after it began to sell its portfolio.  It had an estimated NAV of $5.49 per share as of December 31, 2016, so the REIT still has a long way to full liquidation.  An outright sale would have allowed for a potential large capital reinvestment.  Periodic distributions, even if they eventually total more than the initial $10.00 per share, are harder to reinvest, especially when spread out over more than four years.

Testimony Confirmation

Here is a Wall Street Journal article from yesterday.  The article discusses the securities fraud trial against former American Realty Capital Partner CFO Brian Block.  I had always assumed Block and former ARCP chief accounting officer Lisa McAlister were acting either direct or implied orders.  McAlister's testimony at the trial has confirmed this, but her acknowledgement of past lies does not help her credibility.  This is an ugly mess.

Sounds Legit

First Capital Investment Corporation's (FCIC) board of directors has named its chairman as interim chief financial officer, treasurer, and secretary, as filed in an 8-K on June 23, 2017.  His interim term ends when the business development company files its March 31, 2017, financial statement.  The interim tile may be permanent, given that FCIC's real estate investment trust sibling, First Capital Real Estate Trust (FCRET), has not filed a financial statement since said chairman it took over nearly two years ago.  What could go wrong given that FCIC's first investment was to an affiliate and that multiple FCRET subsidiaries are filing bankruptcy?

Griffin Pounces

That did not take long.  Late Thursday W. P. Carey announced it was exiting the distribution of non-traded investments, and today Griffin Capital announced that it has hired former W. P. Carey executive Mark Goldberg, who among other duties at W. P. Carey served as Chairman of Carey Financial and President of W. P. Carey Investment Management.  I guess Griffin Capital is not the "other" non-traded alternative investment sponsor rumored to follow W. P. Carey's example and quit the industry.

Separately, I always laugh at the sycophantic claptrap quotes in press releases.  Just once I would like to read: "We hired Mr. So-and-so because he is a ruthless SOB who will not only help us gain market share and crush our competitors, but he also will fire the slacking employees we did not have the courage to terminate."

W.P. Carey Quits Selling Non-Traded Products

W. P. Carey filed an 8-K and press release late yesterday afternoon announcing that it will no longer sell non-traded products.  The 8-K was short and to the point:

On June 15, 2017, the Board of Directors of W. P. Carey Inc. (the “Company”) approved a plan to exit all non-traded retail fundraising activities carried out by its wholly-owned broker-dealer subsidiary, Carey Financial LLC, effective June 30, 2017, in  keeping with the Company’s long-term strategy of focusing exclusively on net lease investing for its balance sheet. The Company anticipates that it will incur non-recurring charges to exit its fundraising activities of approximately $10.0 million, in aggregate, during the second and third quarters of 2017, consisting primarily of severance costs.

The news was unexpected, but when you think about the management turnover at W. P. Carey over the past year, culminating in the departure of Carey Financial's President Mark Goldberg earlier this month, the decision should have surprised no one.  W. P. Carey is a large listed REIT and carrying a syndication division that is raising limited capital puts pressure on earnings. 

W. P. Carey provides sponsors that remain in the non-traded space some clear lessons for moving forward:

1  Know your skill set.  W. P. Carey was known for its CPA net leased real estate investment trusts (REITs), not business development companies (BDCs) or hotel REITs.  Carey tried to move away from something it knew, believing its sales organization and substitute products were interchangeable, and that broker dealers would adapt to products based on Carey’s earned reputation with its CPA product.  W. P. Carey's net lease knowledge did not transfer to new product acceptance.

2.  Products matter.  W. P. Carey was late to offer a BDC and then came in with a lackluster sub-advisor and a structure that left W. P. Carey open to broker dealer objections.  (I liked the master / feeder structure.)   Its sub-advised hotel REIT was fine, but as a sector investment it was no replacement product for the core CPA product.   Sponsors need to stick with their knowledge and competency, not chase sectors or product fads. 

3.  Fees matter.  W. P. Carey products were always expensive, especially on the front end, which is a difficult position to maintain in market now focused and concerned with DOL and its low fee requirements.    Yesterday's decision tells me that W. P. Carey was unwilling to adjust its fee structures in a manner to compete with broker dealer requirements in a DOL dominated environment.

The most attractive new products have low upfront costs, and align and subordinate sponsor compensation with investor returns.  Investors need profitable sponsors, and meaningful and attainable incentives for sponsors are required as the industry moves forward.

One final note on W. P. Carey.  Exiting the new product distribution removes a big incentive for W. P. Carey to provide liquidity to its existing investments.  These investments are externally advised, which means they pay asset management fees to W. P Carey.  A liquidity event means those fees go away.  An earnings focused public company will want to extend the fee inflow.

Juggling Chainsaws

Sometimes I get opaque on this blog, and this is one of those times.  I have been reading through several health care REITs' 10-Qs and 10-Ks, and while I am not ready to sound an alarm, I do see an area of concern.  In particular, REITs holding skilled nursing facilities worry me.  Skilled nursing investments are the medical sector that can juice up a healthcare portfolio.  Like student housing is to a multifamily portfolio or mezzanine loans are to a mortgage portfolio, skilled nursing has the potential to add return to a healthcare portfolio.  Skilled nursing properites typically trade at cap rate of 10% or more, which is 200 to 400 basis points or more than other healthcare properties, so when I see REITs buying these properties I take notice.

Skilled nursing is heavily dependent on medicaid reimbursements, which is the lowest level of reimbursement and can represent 80% or more of patients in a skilled nursing facility.  The balance is from much higher paying medicare and private pay patients.  A well run skilled nursing facility needs administrators that can work with hospitals and families to keep the "quality ratio" of medicare and private pay patients high compared to medicaid patients.  Skilled nursing properties that are subject to net leases with operators offer a REIT some protection, putting the patient risk on the operator, not the REIT.  I am seeing skilled nursing facilities in healthcare REITs where the REIT or a subsidiary is the operator, which means the REIT is taking on the operating risk of the facility.  
Skilled nursing facilities trade at cap rates higher than other healthcare properties for a reason - and that reason is risk.  If things go well the extra 200 to 400 basis points is great, but a slip in the quality ratio and that return goes away.  Investing in skilled nursing is a tantalizing opportunity for REIT managers to overcome loads, support distributions, and generate total return.  I am watching to see whether some managers went too far into skilled nursing and bought assets they did not fully understand.

The Unraveling

First Capital keeps falling apart.   Here is an InvestmentNews article on the most recent round of layoffs at the wannbe product sponsor.  The employees no longer on the First Capital "journey" should be grateful.  I bet the First Capital journey won't appear on resumes.  Neither of First Capital's two public programs have filed financial statements, although the InvestmentNews article quotes First Capital's CEO Suneet Singal saying "We plan to have all filings current in short order."  Right.  The DI Wire reported a week ago that the third party firm that provided First Capital's BDC with a chief financial officer and chief compliance officer has terminated its contract with First Capital, leaving the BDC without a CFO or a COO.   This is quite the horror show, but I can't look away.

Palace Intrigue

W.P. Carey's Carey Credit Income Fund 2016 T and Carey Credit Income Fund 2018 T filed 8-Ks late on Friday with the following news:

On May 30, 2017, Mr. Mark M. Goldberg informed W. P. Carey Inc. (“W. P. Carey”) of his intended resignation, effective as of July 10, 2017, from his positions with W. P. Carey, the ultimate parent of the investment adviser to Carey Credit Income Fund (the “Master Fund”) and his positions as President of the Master Fund, Carey Credit Income Fund 2016 T (the “Company”) and each of the other feeder funds, to pursue other interests.

Additionally, Mr. Goldberg has resigned as the Chief Executive Officer and President of the Master Fund's investment adviser Carey Credit Advisors, LLC (“CCA”). Mr. Jason E. Fox, President of W. P. Carey, has been named Chief Executive Officer and President of CCA.

Mark Goldberg has been around non-traded alternative investments since the 1980s on both the broker dealer and product sides.  I view his departure as big news, and it's probably not random.  Carey is coming up on two months with no commission-based non-traded products available to sell, and had to send money back to investors in its Carey Credit Income Fund 2016 T when the offering closed on April 28, 2017, a move anathema to a product sponsor.  Carey Credit Income Fund 2018 T, which was declared effective by the SEC in October 2018, had to refile its prospectus and is pending SEC re-approval before it can offer shares.  The refiling clarifies Carey Credit Income Funds' accounting method for the ongoing trail commission it must pay broker dealers on T shares.  (The ongoing trail commissions are future obligations and a liability that lowers net asset value, and one more reason T shares stink.)  I can't help but wonder whether Goldberg is the fall guy for Carey's product missteps.