The Moody Merger Hot Mess

I thought this blog was the place for sharp analysis in a snark covered wrapper regarding alternative investments.  It seems I have some competition from an old industry player.  Robert Stanger & Co. has published some brutal commentary on the American Financial Trust (AFIN) and Retail Centers of America merger, and Brookfield Strategic Real Estate Partners II's advantageous investment into ARC Hospitality.  Last week Stanger shredded the cockamamie proposed merger of Moody National REIT II's (Moody's II) proposal to merge with Moody National REIT I (Moody I).  Here is the link (via the DI Wire) to read the entire Stanger commentary on the Moody merger.

The merger was originally announced last September.  It makes no sense for me to resummairze the merger because Stanger's report is excellent. The following is Stanger's summary of the merger and the fees involved with it:

So now comes Moody II with an offer to merge with Moody I by issuing shares of Moody II or, subject to an aggregate limit of 50%, cash for each Moody I share. The stated range of nominal consideration to the Moody I shareholders is $10.25 to $11.00 per share, depending upon the level of transaction costs incurred in the deal. While the structure is unusual to say the least, the transaction cannibalizes the inherent value of Moody I investors’ shares by burdening that value with up to $21.8 million of transaction costs. We estimate these transaction costs represent 13.8% of the aggregate Moody I equity value.

To take another bite out of the Moody I investors, Moody II will be denominating the value of the shares of Moody II at $25.00 per share rather than the pro forma Combined Net Investment Amount of approximately $23.00. By our calculation, the aggregate cost and discount related to the fees and possibly overstated stock price ascribed to Moody II in the merger totals about $29.3 million, or about 19% of the pre-transaction equity value of Moody I.

Looked at from a different perspective, the investors in Moody I are incurring up to $21.8 mil- lion of transaction costs to merge with a portfolio comprised of two hotel properties and one note purchased at an aggregate cost of $113 million – a merger which at best will provide liquidity to half of the Moody I investors.

Stanger goes on to detail Moody's II's skirting of the intent of FINRA 15-02, the lack of disclosure to investors regarding financial details of the merger, lack of fee disclosure, and how Moody's is paying financial advisors to recommend clients select the non-cash merger option of taking shares in Moody's II rather than cashing out. 

Moody's II has raised $91.7 million of investor equity through February 2017.   It has been raising equity capital for two years and only owns two hotel properties and a note receivable.  Moody's I closed its offering in early 2015, raised $133 million, and owns twelve hotel properties.  

I will add two points that I did not read in the Stanger report.  First, by merging Moody's I into Moody's II, Moody's I investors now own shares in a non-traded REIT that is still raising money.  Moody's II can extend its offer period another three years.  This is not a liquidity event, but some kind of twisted non-traded REIT hell where investors in a closed REIT get stuck in a capital raising reset.  

Second, if half the Moody's I investors select the cash option, where will Moody's II come up with the cash?  At a $133 million equity raise for Moody's I, that is at least $66 million Moody's II has to find to cash out the 50% limit.  Add this to all the fees Moody's is paying itself, and it is likely Moody's II will have to borrow money to cash out investors and pay fees.  (Moody's II had about $12 million in cash at September 30, 2016, the date of its most recent financial statement.  It is raising about $7 million a month in new equity.)

I urge you to read the Stanger commentary. 

Gibberish With A Dash Of Wisdom

This InvestmentNews article from yesterday has me scratching my head.  It's an opinion piece, loose on facts.  The article is written by the manager of the Resource Real Estate Diversified Income Fund (RREDX), an interval fund that invests a portion of its assets in non-traded REITs.   I am going to address a few points from the article.

This sentence early in the article is an understatement:

The best type of liquidity event is when nontraded REIT investors tend to make a profit on their initial investment.

 Duh.  I'm not sure what I can add to this bit of brilliance.

This specious passage troubled me:

Most liquidations happened in one of three ways:
1) An IPO into the REIT public market
2) A sale to an affiliated publicly traded REIT
3) A sale to a REIT sponsor that is a publicly listed company

Very few non-traded REIT liquidity events involve an Initial Public Offering.  An IPO as part of a listing has a stigma attached to it and indicates a REIT is in financial difficulty.  Does anyone remember Inland Western, now Retail Properties of America's (RPAI) IPO and listing?  An IPO involves raising new equity capital - that is the IPO part - and the few non-traded REITs with IPOs attached have locked up existing shareholders.  This happened with the former Wells Timberland (now Catchmark Timber Trust (CTT)) and BlueRock Residential Growth (BRG). 

A listing of shares not involving an IPO is a more common liquidity event.  Examples include American Realty Capital Trust, American Realty Capital Healthcare Trust (HCT), American Realty New York REIT (NYRT), United Development Funding IV (UDF), Cole Credit Property Trust III (listed as Cole Real Estate Investments)), Wells REIT II (Columbia Property Trust (CXP)), and CB Richard Ellis (Chambers Street (CSG)). 

The second point, the sale of a non-traded REIT to an affiliate requires a listed affiliate, which only applies to a few sponsors.  American Realty Capital, through listed American Realty Capital Properties (ARCP), and WP Carey (WPC) have used this method.  NorthStar Realty Finance (NRF) has the potential to use this strategy, but it has not to date.  Inland has several listed REITs but has not used these traded companies to buy or merge with any other Inland non-traded REIT.

The third point, sale of a non-traded REIT to a listed REIT sponsor, is even more tenuous.  The only example that I can think of is ARCP buying Cole Real Estate Investments last fall.  If the rumored NRF acquisition of Griffin-American Healthcare REIT II ever happens, that would be the second example.  A non-sponsor listed REIT buying a non-traded REIT is more common.  Kite Realty (KRG) purchased Inland Diversified earlier this year and Spirit Realty (SRC) acquired Cole Credit Property Trust II in 2013.  Both acquisitions were positive for the buyers.  Inland sold its second REIT to Developers Diversified (DDR) back in the mid-2000s.  There have been several post-listing acquisitions for former non-traded REITs, too, with Realty Income (O) acquiring American Realty Capital Trust after it listed, and now American Realty Capital Healthcare Trust (HCT) is being acquired by Ventas (VTR). 

If you look at the logic behind point three, it becomes a mute point.  Buying a competitor's non-traded REIT makes that competitor look good by giving it an instant track record and liquidity.  It makes no sense for a sponsor to give this advantage to competitor.  Plus, sponsors make big money during the capital raise and investing period, not so much from managing invested assets.  From a sponsor perspective, it's a poor business decision to buy a fully invested company after this one-time, money making opportunity is gone.

I am sick and tired of the fear-mongering trope about rising interest rates.  This article speaks as if rates have already gone up and stocks have tanked.   The article states:

We have also seen a decrease in the valuation of many of the net lease publicly traded REITs, the asset type that represents approximately two-thirds of the nontraded REIT market, due to concerns about higher interest rates.

Whether or not this is an opinion piece, the statement is wrong.  Check the stock charts of O, SRC, WPC and ARCP.  With the exception of ARCP, all are at, or not far from, 52-week highs, and ARCP is trading strong.  Yields on the ten-year Treasury are below 2.50%, and are down about 50 basis points from the start of the year.  Yes, some day interest rates are going to increase, but it has not happened yet.    

I'll finish on a positive note.  The following statement alone is worth reading the article:

Instead, investors should be prepared to stay in non-traded REIT programs longer and focus on the attractiveness of the investment, rather than an early exit.

Non-traded REITs are long-term investments, not short-term flip vehicles.  Recent liquidity events have been positive for investors, sponsors, and brokers.  I hope it continues.  But any investor in a non-traded REIT should be prepared to hold their investment for the maximum time stated in the offering prospectus, if not longer.

Update

Work has intercepted blogging, but I expect more regular posts soon.   In the mean time, I've been at a loss for a pithy analysis of Kite Realty's $1.2 billion acquisition of the non-traded REIT Inland Diversified, other than it's hard to believe this deal would not have happened without American Realty Capital's and Cole's successful liquidity in several of their REITs.  Combine this with the sour aftertaste from Inland's last listing, Retail Properties of America, and any price above the $10.00 per share offer price paid by investors is a win for Inland, and for Inland Diversified shareholders who'll get fully liquidity when the merger closes.

The View Through A Distorted Prism

Here is a must-read InvestmentNews article from last Friday, where Inland Group of Companies CEO Daniel Goodwin discussed Retail Properties of America's (RPAI) investor lawsuit, and its $254.4 million stock offering and listing from earlier this year.  Goodwin's audacity is hard to believe.  I've had to read this article several times, even cross-referencing it to RPAI's filings, to confirm just how obtuse he is.  The point I took from the article is that Inland is upset with RPAI for its low stock price and has not ruled out joining an investor lawsuit against RPAI. Here are a few paragraphs from the article, which I will address below:

In an interview Thursday, Mr. Goodwin was quick to note that Inland has no control over Retail Properties of America.

“Although we are shareholders, we have not managed the REIT for the past four-and-a-half years,” he said.

Inland owns about 2 million shares of the REIT through various businesses, Mr. Goodwin said.

Some members of Inland's board “disagreed with the timing and execution” of the initial public offering, he said.

“Those opinions were largely ignored,” Mr. Goodwin said.

When asked whether Inland would join the class action against Retail Properties of America, Mr. Goodwin said: “We have discussed various potential actions but haven't reached a conclusion. Our interests are clearly aligned with the shareholders.”

RPAI and Inland do have separate management.  In terms of control, Inland had a representative, Brenda G. Gujral, on RPAI's board until mid-May, so Goodwin's control comment only spans a couple of months.  Ms. Gujral is an executive officer of various Inland entities, and I have listed  below an excerpt from RPAI's 8-K disclosing Ms. Gujral's resignation from RPAI, which was after RPAI's listing (my emphasis added):

On May 14, 2012, Brenda G. Gujral resigned as a Director of Retail Properties of America, Inc. (the “Company”) effective on May 31, 2012. Ms. Gujral has confirmed to the Company’s Board of Directors that her resignation was not due to a disagreement with the Company on any matter relating to the Company’s operations, policies or practices. 

If you can believe the filing, it doesn't sound as though Ms. Gujral, and presumably Inland, had any issues with RPAI's listing back in May.   RPAI and Inland operate out of the same building.  It reminds me of a situation where an adult still lives at home with his or her parents.  (Inland Realty Corp (IRC), another Inland REIT that is listed on the NYSE, still offices at Inland's headquarter building, too.)  With RPAI's focus on retail properties and Inland's focus on retail properties, among other property types, it's disingenuous to think that in four years, two teams of executives acquiring, managing, leasing and financing similar properties and working in the same building operated in isolation, especially when one of the teams is due a big payday based on the other's performance.  If Inland joins the investor lawsuit, it should make for some tense trips in the elevator or maybe some road rage in the parking lot.

RPAI used $55 million of its $237 million net IPO proceeds to repay an affiliate of Inland Group.  In 2009 the affiliate made a $50 million investment into a joint venture between it and RPAI.  It's hard to imagine Inland whining about a receiving $55 million for its $50 million investment.  RPAI's IPO proceeds were smaller than anticipated ($254 million compared to an estimated of $350 million), and the amount of IPO proceeds that went to pay down its underwriters' affiliates' debt was less than originally anticipated.  Inland didn't take a discount and received a repayment of its 2009 joint venture investment in full, plus an extra $5 million.

Inland's $50 million joint venture investment in 2009 probably allowed RPAI to refinance $625 million of debt.*  You can't be revisionist in 2012 and question this deal because the credit markets were non-existent in 2009, and it's to Inland's and RPAI's credit that they were able to complete the refinance in the middle of the credit crisis.  I find it incredulous that Goodwin is complaining about an IPO after proceeds from it repaid Inland its joint venture investment plus 10%.  I'm sure RPAI shareholders would jump at the chance for the same return on investment.

In the article Goodwin states that Inland only owns 2 million shares of RPAI stock.  In a blog post earlier this year, I noted that as part of its 2007 internalization, RPAI acquired its former advisor, an affiliate of Inland.  RPAI paid for its advisor with 11.4 million in split-adjusted shares.  I'm not sure what to make of Goodwin's comment that Inland only owns 2 million shares.  If Inland really only owns 2 million shares, I'd like to know what happened to the other 9.4 million shares.

Inland's internalization fee is now worth $114 million, based on the 11.4 million shares and yesterday's closing price of $10.00 per share.  Is Goodwin's complaint about the listing really a complaint about the low list price, which resulted in Inland's internalization fee not being large enough?  (Originally, the internalization fee, based on RPAI's $10.00 offer price, was $375 million.  This was later reduced to $285 million after a lawsuit.)

I fail to see how Inland's interest is aligned with investors.  RPAI gave paid Inland its internationalization fee in stock at a price determined by Inland.  Investors had to pay cash for their shares.   Inland was well-paid throughout the time it managed RPAI.  The internalization fee was a gift, not a performance fee earned for providing a specified return to investors.   I don't feel any sympathy for a gripe about shares not paid for that have dropped in value from $285 million to $114 million.

RPAI's initial public offering was at $8.00 per share, which was well below estimates of $10 to $12 per share.   It's stock closed yesterday at $10.00, up nearly 20% since its listing (while the IPO was at $8.00, RPAI began trading around $8.50 per share).  As far as I know, Inland's shares are subject to the same multi-staged listing as other RPAI shareholders.  Investors in RPAI's original offering have still lost nearly 60% in share price value, but Inland is still $114 million ahead.

* From RPAI's March 12, 2012's S-11:  "In addition, in 2009, in connection with a $625 million debt refinancing transaction, we raised additional capital of $50 million from an affiliate of the Inland Group in exchange for a 23% noncontrolling interest in a newly formed joint venture to which we contributed 55 of our properties."

Unlinked, Overstated And Leaving The Nest

I received an unlinked acknowledgement yesterday in an InvestmentNews article (yes, I thought about being snarky and not including a link back) on Wells REIT II's wise decision to waive its internalization fee.  The article mentioned that Wells manages $11 billion of real estate assets.  My guess it that the real estate assets of Piedmont Office Realty Trust were incorrectly included in this calculation.  Piedmont was the original Wells REIT, but it is now a separate company, with separate management and a separate location, so its assets need to be excluded from Wells' asset under management.  When Wells REIT II internalizes its management, it too will separate from Wells and take its $6.2 billion of assets with it.  

Losing significant assets is a major consideration for sponsors exploring liquidity options for their REITs.  I hypothesized last week that Cole doesn't want to see the $3.5 billion in Cole Credit Property Trust II assets leave the fold.  The master of keeping assets is WP Carey, which through multiple internal mergers still manages the assets raised through its investment funds.  Inland Real Estate Group has had three of its non-traded REITs go full cycle, two that are still operating (the third was an outright sale of the REIT).  The two still in existence, Inland Real Estate Corporation (IRC) and Retail Properties of America (RPAI), have separate management from Inland Real Estate Group, but operate out of the same office building.  I am not sure why Piedmont physically left Wells, or why Inland stayed.  Maybe it's like children becoming adults and deciding whether to move out or stay at home living with their parents. 

Sponsor assets under management is a serious issue, and one that will play into all non-traded REIT liquidation decisions.

When It Rains, It Pours

It's been a tough six weeks for Inland.  In early April, Retail Properties of America's initial public offering was priced below expectations.   I just read the passage below that was disclosed in Inland American REIT's 10-Q, which was filed on May 7, 2012:

The Company has learned that the SEC is conducting a non-public, formal, fact-finding investigation to determine whether there have been violations of certain provisions of the federal securities laws regarding the business manager fees, property management fees, transactions with affiliates, timing and amount of distributions paid to investors, determination of property impairments, and any decision regarding whether the Company might become a self-administered REIT. The Company has not been accused of any wrongdoing by the SEC. The Company also has been informed by the SEC that the existence of this investigation does not mean that the SEC has concluded that anyone has broken the law or that the SEC has a negative opinion of any person, entity, or security. The Company has been cooperating fully with the SEC.

The Company cannot reasonably estimate the timing of the investigation, nor can the Company predict whether or not the investigation might have a material adverse effect on the business.

Inland American Business Manager & Advisor, Inc. has offered to the Company’s board of directors that, to the fullest extent permitted by law, it will reduce the business management fee in an aggregate amount necessary to reimburse the Company for any costs, fees, fines or assessments, if any, which may result from the SEC investigation, other than legal fees incurred by the Company, or fees and costs otherwise covered by insurance. On May 4, 2012, Inland American Business Manager & Advisor, Inc. forwarded a letter to the Company that memorializes this arrangement.

I am not going to comment on the above, other than to say that the first sentence appears serious.

Update:  Here is an InvestmentNews article on the investigation.  It doesn't have much insight beyond what Inland American disclosed in its 10-Q.

Salt On The Wound

Retail Properties of America (RPAI) investors are being hit with a mini-tender offer, where a third party investment fund is offering to purchase up to 200,000 shares of all four classes of RPAI stock for $6.50 per share.  Remember, investors now own four classes of RPAI stock, the trading and liquid Class A shares, which closed today at $9.15 per share, and the three non-traded classes:  B-1, B-2 and B-3.  The three B classes will convert to Class A shares at six, twelve and eighteen months intervals from when RPAI first listed its stock.  At the end of eighteen months, investors will own just the fully liquid Class A shares. 

The mini-tender is offering to purchase the shares for a split-adjusted $6.50 per share, a sizable discount to today's closing price of $9.15.  (Based on RPAI's original offer price, the tender offer is worth $2.60 per share.)  The investment firm is providing liquidity, at a discounted price, for investors that don't want to wait up to eighteen months for full liquidity.  I know non-traded REIT sponsors hate the investment funds that offer the mini-tender offers, but with RPAI's listed price, investors are better informed about their pricing options than if RPAI was estimating its net asset value.   I'm not sure why an investor would tender the Class A shares when the shares are fully liquid, but stranger things have happened, and if you need the cash, the discount may not be so steep.  RPAI could have stopped the mini-tenders by simply listing all its shares at once, so look for continued mini-tenders over the next eighteen months.

The Valuation's Too Damn High - Part I

I have been shaking my head at recent valuation figures for non-traded real estate investment trusts (REITs).   Whether it's last month's release of KBS REIT I's predictable per share value of $5.16, or Strategic Storage's recent, near jaw-dropping valuation of $10.79 per share, the non-traded REIT valuation process is inconsistent and disparate.  I am going to give my opinions and ideas on valuations over four posts.  In this first post I will focus on the difference between a non-traded REIT's net asset value and its market value, with an emphasis on Retail Properties of America (RPAI).  In the second post I will discuss various valuation methods used by non-traded REITs, the conflicts associated them, and what I feel are the responsibilities of the non-traded REITs' independent board members.    I will give my opinion on the recent trend of REITs, in the midst of long offering periods, revaluing their share prices upward, and the marketing frenzy behind this repricing.  Finally, I will give my thoughts on what should be done with non-traded REIT valuations.

RPAI's recent initial public offering and listing brought into harsh relief one problem with non-traded REITs estimating per share valuations - these valuation approximations may vary significantly from the REITs' stock market values.  In June 2011, RPAI (then known as Inland Western REIT) presented shareholders with an estimated per share value of $6.95.  Investors were rightly shocked when in early April 2012, a short eight months later, RPAI had its IPO and listing at a price equivalent of $3.20 per share.  RPAI has settled in around a split-adjusted equivalent price of $3.60 per share (which is $9.00 per share on NASDAQ due to RPAI's reverse stock split), and while better than its IPO price, the current price is no salve to investors.  The stock market is valuing RPAI around half of what RPAI management estimated its share value less than one year ago, and this with the backdrop of a retail real estate market that is gaining strength.

It's important to understand the distinction between what REIT management estimates a REIT's shares are worth and the price at which the public markets value a REIT's shares.  Obviously, in the case of RPAI there was a big difference.  Listed stocks, whether REITs or high flying tech companies, rarely trade at prices that equal to their net asset value.  Stocks trade above or below their estimated net worth all the time.  The whole Benjamin Graham school of value investing is based on the notion of investing in stocks that can be purchased for less than companies' intrinsic values.   Generally, stocks, REITs included, trade based on the outlook for expected future earnings, not necessarily the value of the underlying assets. 

After a REIT completes its offering period, its sponsor must provide shareholders periodic estimates of the REIT's value.  I will discuss this in more detail in my next post, but non-traded REIT sponsors use multiple factors to determine a REIT's share price, including net asset value estimates and comparisons to other public REITs.  REIT management compiles the data and presents the estimate to the REIT's board for approval.  In a June 20, 2011, 8-K filing, RPAI's management provided an estimated per share value of RPAI's shares and disclosed in generalities the methods it used in determining the $6.95 per share value:

On June 14, 2011, the board of directors (the “Board”) of Inland Western Retail Real Estate Trust, Inc. (the “Company”) established an estimated per-share value of the Company’s common stock of $6.95.  This estimated per-share value is being provided solely to assist broker dealers in connection with their obligations under applicable Financial Industry Regulatory Authority (“FINRA”) rules with respect to customer account statements and to assist fiduciaries in discharging their obligations under ERISA reporting requirements.  The estimated value was determined by the use of a combination of different indicators and an internal assessment of value utilizing internal financial information under a common means of valuation under the direct capitalization method.  No independent appraisals were obtained. Specifically, the estimate of the estimated per-share value was made with primary consideration of the valuation of the Company’s real estate assets which was determined by the Company’s management using methodologies consistent with publicly traded real estate investment trusts in establishing net asset values, and the estimated values of other assets and liabilities determined by the Company’s management as of March 31, 2011.

The estimated per-share value is only an estimate and may not reflect the actual value of our shares or the price that a third party may be willing to pay to acquire our shares.  The Board, in part, relied upon third party sources in arriving at this estimated value, which reflects, among other things, the continuing impact of adverse trends in the economy, the real estate industry and the current public equity markets.  Because this is only an estimate, we may subsequently revise any estimated valuation that is provided.  We cannot provide assurance that:

• this estimate of value reflects the price or prices at which our common stock would or could trade if it were listed on a national stock exchange or included for quotation on a national market system; or 

• this estimate of value could actually be realized by us or by our shareholders upon liquidation; or  

• shareholders could realize this estimate of value if they were to attempt to sell their shares of common stock now or in the future; or

• the methodology utilized to estimate the per-share value, would be found by any regulatory authority to comply with requirements of such regulatory authority, including requirements under ERISA, FINRA rules, other regulatory requirements or applicable law.

Further, the estimated per-share value was calculated as of a moment in time, and, although the value of the Company’s shares will fluctuate over time as a result of, among other things, developments related to individual assets and changes in the real estate and capital markets, the Company does not undertake to update the estimated value per share on a regular basis.

The first paragraph is the key to RPAI's valuation.   RPAI was valued by its management without the use of third party appraisers, or even a third party valuation service, to confirm RPAI's management's assumptions and methodologies.  RPAI's management used the direct capitalization method and "methodologies consistent with publicly traded real estate investment trusts."  No detail is provided on what cap rates were used, or what comparable public company valuation metrics were employed - i.e. FFO multiples.  I'd be curious to know what assumptions RPAI's management made regarding all RPAI's debt, especially the debt maturing over the next several years.  The valuation is only as good as the inputs and assumptions, and while the methods may have been sound, the inputs dictate the output.   

RPAI's management may have convinced itself and the board that RPAI's net asset value was $6.95 per share, but RPAI's stock is currently valued around $3.60 per share share.  The $6.95 price per share may be technically correct based on RPAI's valuation assumptions, but the real, tangible value for investors is, unfortunately, $3.60 per share.  Going forward, the net asset value of RPAI, or any listed stock, is irrelevant to the price an investor can buy or sell shares.

Non-traded REIT managers and the boards of directors better be realistic when providing valuation estimates, because investors rely on these for an accurate approximation of the value of their investment.  If a non-traded REIT expects to list the REIT’s shares on a stock exchange as the planned exit strategy, its management better go the extra step to hone its valuation estimate.  I know it's impossible to accurately guess the price at which the market will value a non-traded REIT.  No one is expecting valuation estimates to exactly match listing prices, but it's not hyperbole to say that a 50% disconnect is unacceptable.  As shown by RPAI, it serves no purpose for a REIT to self-value at a price that has no relationship to what a REIT’s stock could trade for when listed.  Non-traded REIT independent directors need to do their job and demand pricing candor, even if it bruises REIT management egos.

You don't think I was going to pass up a chance to include this picture given the title of this post!

Best Buy Closure List

Here is the Best Buy closure list via The CRE Review.  I need to cross-reference it against some of the non-traded REITs, in particular the Inland REITs, including Retail Properties of America, and Cole REITs, which own retail real estate.  It's important to remember that closing a store doesn't mean that Best Buy is going to stop paying rent.  It's still obligated by its leases to keep making lease payments.

Update:  On a quick overview I didn't see any of Retail Properties of America's Best Buys on the closure list.

Update Update:  Did not see any Best Buy closures in Inland American's portfolio, but its website is clunky (have to search by property for each state), so I didn't check all states.   I only saw one closure in the Cole portfolios, a Best Buy in Fort Meyers, FL, which is owned by Cole Credit Property Trust III. 

(On a separate matter, I don't think I want to know about the 191 Church's Chicken, 42 Applebee's and 26 On The Border restaurants spread across multiple Cole REITs.)

Retail Properties - Use of Proceeds

Retail Properties of America just filed its final prospectus related to its IPO and listing. It raised $254.4 million, and expects to net $231 million after underwriting discounts and expenses.  From the net proceeds, $82 million will pay down RPAI's senior unsecured line of credit, which will be paid to affiliates of the underwriters.  RPAI will use $95 million to repay a cross-collateralized pool of mortgages.  The final $55 million will go to repurchase an affiliate's interest in a joint venture between RPAI and the affiliate. 

Retail Properities of America Prices

Retail Properties of America's (RPAI) IPO was priced last night at $8.00 per share.  This was below the anticipated price range of $10 per share to $12 per share.  The $8.00 price is equivalent to $3.20 per share for original investors due to the 2.5 to 1 reverse stock split RPAI recently executed.  Based on the $8 share price, RPAI raised $254.4 million in the IPO, which was below the estimated $350 million specified in RPAI's S-11 filing last week.   I am not sure if the use of proceeds changed based on this lower equity raise, but originally, lending affiliates of the underwriters were scheduled to receive $170 million from IPO proceeds to repay RPAI debt.

The $8.00 IPO price does not mean the stock will trade at this price.  It looks like early trades are about 9% to 10% above the IPO price, which is positive.

Retail Property of America's Listing Set

I saw this on Seeking Alpha.  Retail Properties of America (RPA) is set to be priced tomorrow night, Wednesday, April 4, 2012, and to begin trading on Thursday, April 5th.  Based on last week's S-11, the target price is $10 - $12 (remember the 2.5:1 reverse stock split).

Inland is distancing itself further from RPA by changing its stock symbol.   RPA will trade under the symbol RPAI.

Inland Western, er... Retail Properties of America

The real estate investment trust formerly known as Inland Western REIT,  recently renamed Retail Properties of America (RPA), has filed several recent amendments to its S-11.  The March 23, 2012, amendment had some points worth noting.  RPA's filing listed an expected public offering share price of $10 to $12.  This price is based on RPA's 2.5 to 1 reverse stock split.  To an original investor, the estimated $10 to $12 listing share price is the equivalent of a $4.00 to $4.80 stock price.  Stated another way, the estimated RPA list price is 52% to 60% lower than an investor's original share price.  There is no assurance the estimated listing price will be realized or that the stock, once listed, will stay above the estimated price.

RPA is seeking to raise $320 million in new equity along with the listing, assuming a mid-point listing price of $11 per share.  The underwriters presented on the front page of the S-11 for the listing and stock offering are J.P. Morgan, Citigroup, Deutsche Bank Securities, KeyBanc Capital Markets, Scotiabank, Wells Fargo Securities and PNC Capital Markets.  Page 44 of the S-11, and this is my favorite part of the S-11, states how RPA plans to utilize the offering proceeds:

Affiliates of J.P. Morgan Securities LLC, Citigroup Global Markets Inc., Deutsche Bank Securities Inc., KeyBanc Capital Markets Inc., Wells Fargo Securities, LLC, PNC Capital Markets LLC and Scotia Capital (USA) Inc. are lenders under our senior unsecured revolving line of credit, and will receive their pro rata portion of the $170 million of the net proceeds from this offering used to repay amounts outstanding under our senior unsecured revolving line of credit. Accordingly, more than 5% of the net proceeds of this offering are intended to be used to repay amounts owed to affiliates of these underwriters.

One motivation for the stock offering is clear; over half the offering proceeds ($170 million of $320 million, or 53%) is going to repay the underwriters or their affiliates.  The underwriters are selling RPA equity to get repaid money they've loaned RPA.  The underwriters or their affiliates get repaid immediately, while the original equity investors have an 18-month deferred liquidity period that starts at an estimated 52% to 60% discount to their original investment in RPA.  There is nothing wrong, unethical or untoward with what the underwriters are doing, but it seems like a tough sale to me.

I wrote a post last week sharing my opinion on internalization fees.  RPA is one reason I believe the internalization fee has a limited future.  RPA's S-11, to its credit, neatly lays out many shares RPA received (its internalization fee) for its advisor in 2007:

2007 Internalization

On November 15, 2007, pursuant to an agreement and plan of merger approved by our shareholders on November 13, 2007, we acquired, through a series of mergers, four entities affiliated with our former sponsor, IREIC, which entities provided business management/advisory and property management services to us. Shareholders of the acquired entities received an aggregate of 37,500,000 shares of our common stock valued under the merger agreement at $10.00 per share. In December 2010, certain of the shareholders returned 9,000,000 shares of our common stock to us in connection with our settlement of a lawsuit relating to this

acquisition. As a result of the mergers, we now perform substantially all of our key operational activities internally. In connection with the mergers, we and our former business manager/advisor and our former property managers entered into a number agreements and amendments to agreements with The Inland Group, Inc. and certain of its affiliates. See “Certain Relationships and Related Transactions.”

RPA's former advisor, or its shareholders, owns 28,500,000 shares of RPA stock, not adjusted for the reverse stock split.   Based on the estimated share price of $4.00 to $4.80, this gives the internalization fee a current value of $114,000,000 to $138,800,000.  (Adjusting for the reverse split gives the same result - 28,500,000 shares divided by 2.5 equals 11,400,000 shares, which multiplied by $10.00 is $114,000,000, and multiplied by $12.00 is $136,800,000.)

A four-and-half-year period between internalization and listing is a long time, especially given what has happened to commercial real estate and the capital markets since late 2007.  Internalization fees may not be gone, but I don't think we'll see a situation anytime soon where investors lose over half their investment and management walks away with a $100 million payday.

Creativity Fail

Inland Western REIT has changed its name to Retail Properties of America, Inc.   American Realty Capital is already offering a similar product, Retail Centers of America, Inc.  Why would Inland Western change its name to almost match a competitor's exisitng product?  Maybe imitation is the best form of compliment, or maybe it's a case of dialing it in.  It's creativity failure either way.  To me, it's more likely that Inland is distancing itself from a product that has struggled so that Inland can protect its brand for its current and future offerings.  

The former Inland Western's Net Asset Value per share is 30% below its original offer price, and while it has worked hard for investors to keep paying a distribution, and has increased it nine quarters in a row, the current distribution (2.6% annualized) is well below the REIT's original distribution.  In the REIT's defense it raised and deployed capital in the mid-2000s in retail real estate, one of the real estate asset classes most impacted by the recession and housing slump.  The former Inland Western also fought to refinance debt that matured near the worst of the credit crisis.  Inland should have put more thought and originality into the name change.