Thursday, July 27, 2017

Money Where Your Mouth Is

W.P. Carey closed its syndication business at the end of June, citing high prices for net lease real estate as a reason.  According to Carey, offering its real estate investment trusts no longer made sense due to low cap rates, which means that net lease real estate is too expensive to buy and the yields too low.  I am going to call baloney on this excuse.   If Carey believed its rhetoric it would be either selling the entire company to maximize shareholder value to take advantage of the high net lease values, or it would be selling individual properties or portfolios in particular low cap rate sectors.  I have not read an announcement that Carey is looking for strategic buyers, and its property sales listed in its most recent 10-Q appear incidental.  Two the four listed dispositions in the first quarter involved giving properties back to the lender, not a real estate company's favorite type of disposition, and not the moves of a company capitalizing on a strong market.  Carey did not buy any meaningful real estate, either.

Carey had a unique syndication business.  It was conservative in its approach to managing its real estate funds - favoring long-term mortgages and not the tempting, low interest, variable rate lines of credit adopted by so many sponsors to increase near term cash flow - and its sales team was always professional.  Carey's core REIT product had some of the highest up-front fees in the industry along with some of the lowest ongoing fees.  This runs against today's market, which wants lower up-front fees so that investor's initial statement values do not differ too much from the share price investors paid for their shares*. 

It is my opinion that Carey, as a listed company, expected to make a certain amount of revenue and profit on the high initial fees of its syndication business, and likely built this revenue into its earnings estimates.  I suspect that Carey was unwilling to adapt to products that provided it less up-front revenue and short-term profit, even if it meant foregoing greater profit potential over time.  If it lowered its initial fee income Carey would have to lower earnings estimates, a task loath to any company.  I have been hearing that net lease real estate is too expensive for years, since at least late 2013 or 2014.  Maybe it is, heck, it probably is, no one knows for sure.  Until Carey puts itself up for sale, or sells large portions of its portfolio, I will stick with my opinion that Carey was unwilling to lower up-front fees and that is why it exited the syndication business.

*For example, an investor buys shares listed at $10.00 per share.  With a traditional front end cost of, let's say, 11%, an investor that bought shares at $10.00 would get an first statement showing a real value of $8.90.  Sponsors have been lowering, paying, deferring, and reclassifying costs to bring the statement value up to a more investor palatable price, which are discounted 4% to 6% ($9.60 to $9.40 per share) rather than the 11%.   

Wednesday, July 19, 2017

Alphabet Asphyxiation

Alternative investment sponsors are hurting themselves with all their multiple share classes.  There are Class A and Class K, Class C and Class T, Class D and Class P, and Classes S, W, and I.  Oh my!  I am sure there are more share classes, but these are the ones that come to mind.  Sponsors are confusing investors and advisors in an attempt to blur the difference between the price investors pay for their shares and the price that shows up investors' initial statement.  Sponsors have spent millions of dollars creating multiple share classes that try to solve the riddle of what discounted share price is investor-acceptable enough to the initial purchase share price.   

It is time for sponsors to simplify.  I would like to see two share classes:  Class A shares with a 5% commission and a no-load Class I shares.  Sponsors should ditch all other share classes, starting with the malignant Class T shares.  Class T shares penalize investors, advisors, and broker dealers, but allow sponsors to maintain, if not increase their fees.  Class T share investors get a lower distribution because the ongoing "distribution fees" payable to advisors are credited against investor distributions for three or four years, advisors get lower commissions than in an upfront loaded share class, and broker dealers have seen their fees reduced for selling alternatives.  But sponsors get more money because their acquisition fees are based on net investable assets, and because the Class T shares provide more net investable assets, the Sponsors' fees are higher. 

Despite this dichotomy, Class T shares are bringing in the most non-traded REIT capital at funds that are raising any meaningful money.  But there is a glaring consequence to the push for Class T shares - low level equity inflows.  Excluding the Blackstone non-traded REIT, only four non-traded REIT sponsors raised more than $20 million in equity in June, and one of these firms was in a close-out that skewed sales upward.  Only three non-traded REITs raised more than $20 million, and again, one was in a close-out.  Twenty non-traded REITs failed to break the $20 million level, and eighteen of these did not even raise $10 million.  This is bad.  Failure to launch or death by neglect are cliches that have become real points of analysis. 

Advisors, as a group, have never avoided high fee products as long as their compensation was not impacted.  Advisors know their fees have been lowered while sponsors make the same or more, and are looking for other investment options, and twenty-six share classes, or one for every letter in the alphabet will not solve this issue.

Wednesday, July 12, 2017

Getting Serious

CNL / KKR's Corporate Capital Trust (CCT), a business development company (BDC), filed an 8-K on Monday, July 10, 2017, announcing that it plans to list its shares on the NYSE shortly after its August 3, 2017, shareholder meeting.  It plans to trade under the stock symbol CCT.  The planned liquidity event was initially announced on April 3, 2017, and a fourth-month time from announcement to listing is fast.  As part of its listing, Corporate Capital Trust is lowering its annualized distribution to $.715 per share from $.805 per share.  It will make two special distributions over the next year of $.045 per share each to make up for the $.09 per share by which it is dropping the distribution. 

The distribution adjustment puts it in line with what Corporate Capital Trust is earning in its Net Investment Income, while the bonus distribution is coming from cash reserves.  Realistically, the market's reception to a BDC paying a distribution more than its net investment income would not have been kind, so the cut makes sense for shareholders.  Corporate Capital Trust's Net Asset Value per share is currently $9.00 and has ranged from a high of $10.15 per share in June 2014, to a low of $8.62 per share in March of 2016.  The price investors paid for their shares is NAV plus offering costs.  Investors should use the price they paid for their shares to determine their yield, not the current NAV.  For example, if an investor paid $10.00 per share their yield is 7.15%, and if an investor paid $11.00 per share their yield is 6.5%

A nearly $3 billion liquidity event is good news for a market place that has not seen any liquidity in a long time.

Saturday, July 08, 2017

Shroud of Fireworks

FS Energy & Power filed an 8-K late on July 3, 2017, announcing that it had decreased the price at which it would issue shares under its distribution reinvestment plan.  The day before a major holiday is a good time to release some bad news.  The decrease was from $7.65 per share to $7.20 per share, or a 5.9% drop.  This is a big decline in what is essentially the BDC's net asset value.  There is optimism in the energy sector, but like with all other assets, energy is subject to the supply and demand.  Oil closed today at $44.33 a barrel, near its low for the year. 

Friday, July 07, 2017

Just End It Already

According to this Reuters article, Sears is closing another forty-three stores - eight Sears and thirty-five Kmarts - in addition to the 150 stores it had already said it was closing in 2017.  Just shut them all and be done.  Sears is even closing its store in San Diego's UTC mall, a regional mall undergoing a huge expansion and that shows no signs of experiencing the downturn afflicting other regional malls.  If Sears cannot make that location work, it has no business staying in business.