NorthStar Interview

I hope you were not drinking coffee while reading the DIWire's interview with NorthStar Securities' Tim Toole this morning.  You would have laughed it all over your computer or electronic device.  Gosh, what drivel.  Given that NorthStar Securities had only raised about $30 million over the first eleven months of 2017, or that NorthStar's first two REITs are combining with certain assets from Colony NorthStar to form a new REIT, or that yesterday NorthStar Healthcare Income REIT announced its cutting its 6.75% annualized distribution in half to 3.375%, or that NorthStar executives David Hamamoto, Daniel Gilbert, and Brett Klein have all announced they are leaving Colony NorthStar early in 2018, and finally that Colony NorthStar announced earlier in December that it is combining NorthStar Securities with S2K Financial Holdings, one of the few firms that managed to raise less money in 2017 than NorthStar Securities, the Q&A had plenty of important topics for discussion and explanation.

Nope.  None of these major events were addressed in the Q&A.  Instead we learned Tim's work history, his favorite book, his fear of Trump tweets, and that he is an adventurous vacationer.  Let's call this puff piece what it is:  Tim Toole marketing himself to other sponsors now that he has been made redundant with the S2K transaction. 

Rotten Wood

I just read this InvestmentNews article on the mess that is Woodbridge Group.  Information on one of this outfit's note programs crossed my desk a year or two ago and was summarily dumped in the trash.  According to the InvesmentNews article, Woodbridge raised more than $1 billion, some of which was in its note programs.  In reading Woodbridge's website it states it has "completed over $1 billion in financial transactions," which could mean anything on a real estate promoter's website, but also means it did not raise $1 billion from investors.  Woodbridge has defaulted on its one-year note so investors are no longer getting interest on their notes and their principal is probably in trouble, too, as it now a general unsecured claim. 

For an added outrage and the real reason I am writing this post, Woodbridge's CEO, Robert Shapiro, resigned last Friday but signed a consulting contract that pays him $175,000 a month.  That is stunning.  I am not sure how a bankruptcy judge can let this stand.  This guy needs his previous salary clawed back.

Memo to all:  I don't know if the Woodbridge programs matched any of following points, but as a rule avoid (where avoid means never, never, never consider) note programs where your proceeds are acting, in effect, as development equity for a sponsor.  Here are just some of the issues you face:

• Development real estate does not generate cash flow to pay your interest, which is important if you are a note holder dependent upon interest payments; 
• Your notes are subordinated to all other debt including construction and bridge loans, so if something goes wrong, your notes are likely worthless; 
• The full value of the property, which is essential to repay your note principal and that may or may not secure your notes, is not realized until the development is complete;
• You are the last debt to get repaid; and, 
• You share in none of the economic upside, outside of receiving interest and a return of your principal, if the development is successful.  The sponsor keeps this gain and has used your cheap financing to earn its profit.  You took equity-type risk for debt-like returns.

Second memo to all:  Avoid (see above for definition of avoid) note programs that are unsecured, and really, really avoid unsecured notes that are corporate financing for sponsors.  It is a red flag if an investment fund sponsor also offers investments in itself.  Again, you take all the risk, like Woodbridge note investors, and the sponsor gets all the benefits, and when the sponsor loses your money, its former CEO still gets to make $175,000 per month while you get nothing. 

Third memo to all:  Avoid (see above for definition of avoid) sponsors that claim to offer "next generation financial products." They don't exist. The only next generation that should concern you is is your grandchildren and not losing their inheritance.

UDF's Taint

I heard the rumor a few weeks ago that Houston-based independent broker dealer IMS Securities could close down due to an arbitration claim related to the sale of UDF IV, among other investments.  Today, InvestmentNews is confirming the rumor.  That's too bad.  Whether or not UDF is ever proved to have run ponzi scheme, as alleged, its other major flaws - affiliated dealings, high fees, high distributions supported by loans that generated no current interest, many of which were routinely extended, to name a few  - were clearly visible in filings.