Monday, January 29, 2018

Don't Look Now

Colony NorthStar (CLNS) is about to hit $9 a share, a post merger low. All the NorthStar employees are now gone, leaving just one-year after the merger closed.  I am guessing the departure decisions were tax related.  I wonder whether they were paid their merger proceeds in cash or CLNS stock? 

Tuesday, January 23, 2018

Why?

Remember risk and return still matter, despite a bonkers stock market.  There is an income-focused closed end interval that is raising capital that highlights risk and return.  This fund is paying a distribution of approximately 4.5%, or less.  This is a high yield fund that plans to use leverage to enhance its returns.  I don't see how a leveraged high yield fund that is only paying a 4.5% distribution is competitive.  It's an interval fund so liquidity is limited.  There are a number of fully liquid traded funds with similar objectives that are paying yields of 9.0% or higher.  These yields show the risk of leveraged high yield funds. Why would anyone want to invest in a fund that gives full risk while providing only half or less than the yield (return) of competitive investments? WHY?

Mission Critical's Capital Distribution

Carter Validus Mission Critical REIT (CVMC) announced in an 8-K yesterday that it is distributing $560 million, or $3.00 per share to investors from its recent property sales.  This is the equivalent of a 30% return of capital.  The gross property sale proceeds totaled $1.296 billion, and included the data storage transactions I discussed here, along with two other sales, including one of the three troubled medical properties CVMC discussed in its December 29, 2017, valuation filing.  Subtracting debt repayments, transaction costs, joint venture payments, and $101 million the REIT is reserving gets  to the $560 million being returned to investors.

CVMC is lowering its distribution.  The new distribution is 6.7% based on the revised net asset value of $6.26 per share, which is the NAV the REIT disclosed on December 29, 2017, less the $3.00 per share return of capital distribution.  This new distribution rate is the equivalent of 6.0% on the original remaining capital of $7.00 per share, which is a reduction from the previous 7.0% per share distribution.

For an interesting exercise, take CVMC's September 30, 2017 total assets, subtract the property sales and remaining debt, and then compare this figure to the original capital the REIT has remaining, including the $101 million of capital that was not returned to investors.  Conclusion?  Well, I'll let you do the math, but if you get more than $1.2 billion leave a comment.

Monday, January 08, 2018

Merger Misfire

It has been almost a year since the Colony Capital, NorthStar Realty Finance, and NorthStar Asset Management's tri-party merger closed and began trading on the New York Stock Exchange under the symbol CLNS.  In a year that saw the S&P 500 rise 19%, CLNS fell 20%, nearly an inverse perforamnce to the broader market.  As an encore to 2017, CLNS is off 4% so far in 2018.  I don't think these results were what CLNS planned from the tri-party merger.  But given how inert the CLNS retail product side has been, I am not sure what results could have been expected.  Advisors and investors have shunned CLNS's lackluster, non-core, non-traded REIT (good luck finding any reference to CLNS's 27% ownership in RXR anywhere on CLNS's website) and its closed-end fund that is similar in objective to NorthStar's two distribution overpaying income REITs. 

The chronic distribution over payments at NorthStar's three income non-traded REITs are serious.  In an under reported December 2017 move, NorthStar Healthcare Income REIT cut its distribution in half, abruptly facing the reality of the income its investments were generating.  I am watching the merger of NorthStar Income I and II with certain CLNS assets to not only see what the new market value is compared to the original purchase price for each REIT, but what the new distribution is compared to what the two REITs are paying investors.  While their distribution over payment is not as acute as Healthcare's, Income I and II still pay out more in distributions than they generate in cash. 

The Colony and NorthStar executives had six months before the merger closed to devise new products and strategies that leveraged the strength of the new organization.  No products were announced at the time of the merger and nothing has been announced since the merger closed a year ago.  CLNS is selling the products NorthStar already had available or in registration.  Most NorthStar executives are now gone from CLNS, or will be soon.  It is hard not to think this executive exit was in the works all along.  The lack of initiative, innovation, or impetus has made CLNS and its retail products not only unattractive, but worse, irrelevant.

Tuesday, January 02, 2018

Looking Critical

Carter Validus Mission Critical REIT announced a new net asset value late on Friday, the last day of a holiday week, right before another holiday weekend.  Mission Critical's timing makes sense when you unpack the filing.  On the surface it's bad:  the REIT's net asset value dropped 7.6% from $10.02 per share to $9.26 per share, based on September 30, 2016, and September 30, 2017, valuation dates.  The news does not get better.  The REIT's real estate valuations, which were down 4.6% year-over-year, included the sales price valuation of the REIT's fifteen data centers.  The sale of the fifteen data centers closed at the end of December 2017 and represented a gain over their book value of $239 million.

I am not optimistic about the REIT's remaining properties if the REIT's total valuation is down 4.6%, but includes the valuation of the fifteen properties sold at 29% gain to book value.  The fifteen property sale is no trifle, they sold for $1.065 billion and netted $768.5 million to the REIT, which is 45% of the equity the REIT raised from investors.

The REIT's letter to investors describing the lower valuation, blamed the decrease, in part, on three healthcare properties and confusingly "certain lost rental income and reserves and write-offs recorded on tenant related notes receivable from certain healthcare care assets."  The three properties, Walnut Hill Medical Center, Cumberland Surgical Hospital and Miami International Medical Center had a combined purchase price of $160,551,000.

The Friday filing also included this passage related to the recent property sales: "We will evaluate and determine how to best deploy the proceeds from our dispositions, including potentially paying a special distribution to stockholders."  The italicized bold is my emphasis.  I have seen other sponsors make large sales and not distribute the proceeds to investors to avoid acknowledging that the income from the remaining assets is insufficient to cover current distribution rates and are likely of lower quality than those that were sold.  Given Carter Validus Mission Critical's chronic over payment of its distribution, apparent trouble in its remaining healthcare assets, and its inability to have a liquidity event in 2015, I am afraid the REIT will reinvest the $768 million rather than return the capital to investors.  Carter Validus is still raising money in Carter Validus Mission Critical REIT II, and while the thought of recycling a portion of a $768 million capital distribution into REIT II may be tempting, I suspect Carter Validus's fear of stopping REIT II's capital inflow will take precedence if it reckons with REIT I's remaining portfolio.  I think there is a good Carter Validus decides to reinvest the $768 million.

Carter Validus REIT I:  Do the right thing and return the $768 million.