Liquidity Events and Hyperbole

I re-read the Bruce Kelly article I linked to earlier in the week.  The article stated that there were only two liquidity events in the first half of 2014.  Bruce missed a few.  Here are the liquidity events I know of in the first half of 2014:

Liquidity Events First Half of 2014
Fund	Month	Original Equity (Billions)
ARC Trust IV	Jan	$1.7
CPA 16 Global	Feb	$1.9
BlueRock Resid.*	Feb	$-
ARC Healthcare	April	$1.7
ARC New York REIT	April	$1.7
UDF IV	June	$0.6
FSIC	April	$3.0
TOTAL		$10.6

In addition to ARC Healthcare and ARC New York REIT, the first half of 2014 saw ARC Trust IV complete its merger into American Realty Capital Properties (ARCP), CPA 16 merge into WP Carey, and the listings of Blue Rock Residential Growth* (BRG) and UDF IV (UDF).  I included the April listing of the first Franklin Square business development corporation, Franklin Square Investment Corp (FSIC), because while not a REIT it was a non-traded investment that provided a liquidity event. 

The strange part of the Kelly article was the Inland executive gloating about Inland Diversified's completed merger with Kite Realty:

The deal has been one of the most successful for nontraded REIT investors in the recent past, Mr. Sabshon said.

He noted that on July 2, the first full trading day for the Inland Diversified/Kite merger, Kite closed at $6.40. At an exchange rate of 1.7, that translates to an Inland Diversified exit value of $10.92, he said.

Excluding nontraded REITs that were purchased by related or affiliated REITs, a common industry practice, the Inland Diversified merger represents the highest nonaffiliated transaction exit price in two years, Mr. Sabshon said.

Yes, Inland Diversified's sale to Kite Realty was a successful liquidity event.  No, it was not the most successful listing of the past two years.  Does anyone remember the Cole Credit Property Trust III listing a year ago?  I believe there was some controversy surrounding this listing, but it opened at $11.50 per share.  The Inland executive's arbitrary exclusion of affiliated liquidity events makes no sense.  Is cash from an affiliated liquidity event worth less than cash from a non-affiliated liquidity event?  The CPA 16 and ARCT III liquidity events were with affiliated entities and traded at values higher than Inland Diversified's 9% premium.  I am taking nothing away from Inland Diversified's listing and its returns to investors, they are commendable and more than respectable, but let's lower the hyperbole. 

*  BlueRock Residential Growth (BRG) only raised about $23 million of investor equity in its multi-year offer period.  BRG's listing involved an IPO where the original investors received three classes of illiquid Class B shares.  The first B class does not convert to liquid shares until twelve months after the listing, and it'll be two years post-listing until original BRG shareholders are fully liquid.  BRG is a listing but should not be considered a liquidity event.   Its equity raise was so small it would not even show on the table above.

Crap Storm Warning

This afternoon, Strategic Realty Trust disclosed in a SEC filing that it has determined a new net asset value (NAV) of $7.11 per share.  The REIT raised capital at $10.00 per share.  It issued valuation estimates during the offering period that reached $10.60 per share.  This $10.60 per share claim was as recent as early 2013 when it completed its offering period.  The new value represents a 33% decline in NAV in eighteen months, which was during a period of rising commercial real estate values.

This blog talked about Strategic Realty here, where it referenced an InvestmentNews article, and I talked about the REIT's valuation process here. 

This is ugly and someone is going to have to answer some tough questions. 

Starting To Make Sense

I wrote yesterday that I was not going to pay attention to any rumors until they showed up in a Bruce Kelly article.  No sooner than I had posted that comment than I read Kelly's report that NorthStar Realty Finance (NRF) is in talks to buy the Griffin-American Healthcare REIT II.  His story reads as though he sourced it through the same Financial Times article I referenced.  Kelly's article provides a good rundown of recent non-traded REIT liquidity events in addition to NorthStar's potential purchase of Griffin-American Healthcare REIT II.

At first I didn't understand why NRF would spend $3.7 billion to $4.0 billion for a healthcare REIT.  I immediately thought it was a way to combine the NorthStar and Griffin-American non-traded REIT sales platforms.  I have always primarily viewed NRF as a real estate finance company that, to a lesser extent, owned other real estate, including healthcare, manufactured homes and hotels.  Then I read NRF's first quarter 10-Q and the Griffin-American Healthcare REIT II acquisition makes more sense.  NRF hired James Flaherty III in January to build NRF's healthcare business.  From NRF's 10-Q:

In January 2014, NSAM entered into a long-term strategic partnership with James F. Flaherty III, former Chief Executive Officer of HCP, Inc., focused on expanding the Company’s healthcare business into a preeminent healthcare platform (“Healthcare Strategic Partnership”). In connection with the partnership, Mr. Flaherty will oversee and seek to grow both the Company’s healthcare real estate portfolio and the portfolio of NorthStar Healthcare. In addition, the partnership is expected to focus on raising institutional capital for funds expected to be managed by NSAM.

NSAM is the company NRF spun off earlier this month.  NSAM is NRF's asset manager and it or an affiliate will serve as the distributor and advisor for NRF's non-traded REIT business.   Mr. Flaherty is also the CEO and President of NorthStar Healthcare Income, Inc.  In May 2014, NRF acquired a $1.1 billion portfolio of healthcare properties, primarily assisted living and skilled nursing facilities.  NRF now has $1.63 billion of healthcare assets and is seeking to aggressively grow this business, and this explains NRF's interest in the  Griffin-American Healthcare REIT II portfolio.  NRF's first quarter 10-Q is worth a read because it discusses Mr. Flaherty's financial incentives to growth the healthcare business. 

How NRF would finance the Griffin-American Healthcare REIT II acquisition is another consideration, but the rationale for the purchase is clear.

LIBOR Plus ?!?!

When United Development Funding IV (UDF) listed on NASDAQ in early June it offered to repurchase up to $35 million of shares at a price of $20.50 per share.  The tender offer was oversubscribed by about three times, which was not unexpected.  UDF, in a filing last week, disclosed that it is financing the entire share repurchase with a $35 million loan from an entity called Waterfall Finance 4, LLC.  The loan has a one-year term and is due July 2, 2015.  UDF is paying LIBOR plus 9.0%, and interest is due monthly.  LIBOR is currently around .25%, so UDF is paying about 9.25% for the money.  I am snarkless.

Shut Up Already

The Financial Times published another apparent non-story last week.  (Sorry, no link to the story but you can Google it.) This one was on the alleged acquisition by NorthStar Realty Finance (NRF) of Griffin-American Healthcare REIT II at a price tag of $3.7 billion to $4.0 billion.  In late May the same FT reporter, Ed Hammond, had a story that Dividend Capital's Industrial Income Trust was looking to sell itself for $4 billion.  I discussed that article here. 

Nothing has happened yet with Industrial Income Trust, and a week and a half later I've read nothing else on a NRF / Griffin-American Healthcare REIT II combination.  In early May, Griffin-American Health REIT II was subject of a Wall Street Journal article on another impending sale that never happened.  I noted the WSJ article here.  I'm not sure what's going on with these rumors, but suspect they are attempts to drive up merger prices by attracting additional potential buyers.  From now on until Bruce Kelly reports a combination I'm not going to take any story seriously.

Based on data in the May Wall Street Journal article, a price of $3.7 billion to $4.0 billion for Griffin-American Healthcare REIT II would result in share price of $12.63 to $13.66.  If the merger leaks are an attempt to drive the price for Griffin-American higher, whoever is blabbing to reporters should stop.  A price per share range of $12.63 to $13.66 is excellent, especially since the REIT finished its equity raise less than a year ago at prices of $10.00 to $10.22 per share and paid a load of 12% on that equity. 

A NorthStar / Griffin-American Healthcare REIT II merger presents more narrative than was addressed in the short FT article.  Both Griffin and NorthStar operate respected syndication businesses.  Where do these play into the merger, if at all?  A combination of this business would be interesting and have more implications than just a single REIT's liquidity event.

Separately, but tangentially, Griffin-American Health REIT II shareholders are being solicited by mini-tender offers.  The companies that issue these tender offers usually make offers at deep discounts to prices paid by investors for their shares.  The current tender offer price for Griffin-American is $10.00 per share, essentially no discount to the price most investors paid for their shares.

Vacancy Sign Flashing

Here is a Bloomberg article on recent transactions in the hotel sector.  It has been an active sector.  I missed the NorthStar (NRF) news last month that entered into a nearly $1 billion joint venture with Chatham Lodging for forty-seven limited service hotels.  The article lists so many transactions it does not even get into some of the back stories, like how American Realty Capital Hospitality Trust, which is in the early stage of its equity raise, is financing the 126 hotels it is buying from affiliates of Goldman Sachs for $1.93 billion. 

I would point out couple of additions to the article.  First, the terms "limited service" and "select service" seem blurred, but are two distinct categories.  Most of the transactions listed in the article have happened in the limited service category, which include brands like Courtyard, Homewood Suites, and Hampton Inns.  Select service is a lower amenity property and includes brands like Days Inns and Super 8.  Management, marketing, pricing and valuations are different for limited service and select service hotels.

Second, the article points out that:

The U.S. hotel industry has recovered since the financial and real estate market meltdown. Room rates in the first five months of this year hit a record, according to Jan Freitag, senior vice president at research firm STR Inc. This year through May, the average price for a hotel stay nationwide jumped to $113.58 a night, up 4.1 percent from a year earlier, according to Hendersonville, Tennessee-based STR.

And, it notes that the volume of deals (again confusion with the term "select service") in 2013 was the most since 2006.  The article does not mention the impact of new hotel supply.  I believe it was much higher in 2006 than current levels.  This means, in part, that an economically sensitive sector will not have the addition of new supply to contend with, which pressures rates and occupancies, when the economy slows.  Of course, high trading values for hotel properties, strong occupancies and increasing room rates is going to attract hotel developers.

Know The Brand - Part II

InvestmentNews' Bruce Kelly confirms what WP Carey's CEO Trevor Bond said on a conference call last month:  WP Carey has no plans to launch CPA 19 as a follow-on to its previous CPA programs.  Kelly's article is full of good information.

Spain Rising

I have watched for a Spanish economic recovery for no other morbid reason than Spain was hit so hard by the late 2000's credit crisis and recession.  I believe that a Spanish rebound signifies good news for all of Europe.  Spanish unemployment is currently 26% and is not expected to dip below 20% until 2017 according to S&P, which is not encouraging (unless you view the hiring that would cause the unemployment rate to drop six percentage points as positive).  But Spain's economy is improving and it expanded twice as fast as the Euro region in the first quarter (Bloomberg).  Here is a Bloomberg article on the beginning recovery of Spanish residential real estate.  The Spanish economy is still bleak, but appears to be moving in the right direction.

Mind the Debt

I received a comment on an old post over the weekend referencing this Financial Times article (subscription required), which states that Dividend Capital's Industrial Income Trust is looking to sell itself for $4 billion.  The comment said I should not have questioned Industrial Income's 2012 revaluation, which at the time - in the midst of the REIT's offering - valued the REIT at $10.40 per share.  The person who posted the comment calculated that Industrial Income Trust, at $4 billion, was worth $18.50 per share.

I read the Financial Times article and Industrial Income's most recent 10-Q, and unfortunately came up with a value well short of $18.50 per share.  You must remember that while Industrial Income may sell for $4 billion, it has just about $1.9 billion of debt, so the net equity is closer to $2.1 billion.  Here is my math:

Value	$4,000,000,000
Debt	$1,914,691,000
Net Equity	$2,085,309,000
Shares Outstanding	$208,135,000
Equity Value Per share	$10.02

Industrial Income raised $2.1 billion in its offering and through its distribution reinvestment - about what a $4 billion sale would recover after accounting for the REIT's debt. 

Industrial Income's first quarter net operating income was $58,292,000.  If you annualize this figure (multiply it by four) and divide by the $4 billion price tab, you arrive at a cap rate of 5.8%.  The 5.8% cap rate seems rich, but maybe the market is pricing in the REIT's 67% lease turnover before the end of 2019, and the potential to sign new leases at higher rates.   I am surprised that at a 5.8% cap rate Industrial Income doesn't have more equity value than $10.02 per share.    The REIT's initial offering costs and over payment of distributions early in its life are real expenses that must eventually be reflected (deducted) in value.

I think it's great Industrial Income is looking sell for $4 billion.  If it can sell its portfolio of industrial properites at a 5.8% cap rate, it should accept this deal without hesitation.

The Financial Times article had a misstatement.  Industrial Income is not a private company.  It is a non-listed public company. 

(Note that my figures are very rough and are shown for general illustrative purposes not to determine an actual valuation.   The actual share price an investor may receive from any Industrial Income sale would likely vary as there are many more considerations than I have listed that would factor into any sale.)

All Apartments

I have some apartment-related links to post.  First two links are to articles on last week's housing figures, and how multifamily construction is driving residential home construction.  The first is from the New York Times' excellent new The Upshot section.  It states that the improved home construction figures are a result of new apartments being built, not single family homes.  The second is from the FiveThirtyEight blog.  It, too, notes that apartment building makes up a large portion of housing construction growth, but FiveThirtyEight is negative on the implications of this trend to rent for the greater economy.  Both articles are worth reading as smart insights on the housing market.

The Calculated Risk blog provides insight on the apartment market.  It makes this statement:

This favorable demographic (the number 20 - 34 year old people (prime renters) is expected to stay high through 2030) is a key reason I've been positive on the apartment sector for the last several years - and I expect new apartment construction to stay strong for several more years.

New supply will probably increase by 250,000 to 260,000 units this year - and increase further in 2015 since it can take over a year from start to completion for large complexes.  Note: This doesn't include houses converted to rentals - and that is a substantial number in recent years.

This suggests new supply will probably balance demand soon, and that means vacancy rates are probably close to a bottom.

The construction of new apartments, as well as seeing vacancy rates close to the bottom, may mean cap rates are near a low, as multifamily buyers have more options.  This may be one reason Blackstone, which has been a big seller of various real estate asset classes this year, is looking to buy apartments.  Here is a Bloomberg article on Blackstone's new apartment venture, LivCor.  Apparently, Blackstone sees the growing demand and the new supply as opportunities.

New supply will probably increase by 250,000 to 260,000 units this year - and increase further in 2015 since it can take over a year from start to completion for large complexes.  Note: This doesn't include houses converted to rentals - and that is a substantial number in recent years.

This suggests new supply will probably balance demand soon, and that means vacancy rates are probably close to a bottom.
Read more at http://www.calculatedriskblog.com/2014/05/apartments-supply-and-demand.html#rdH8T3zHEXDyhmaf.99

New supply will probably increase by 250,000 to 260,000 units this year - and increase further in 2015 since it can take over a year from start to completion for large complexes.  Note: This doesn't include houses converted to rentals - and that is a substantial number in recent years.

This suggests new supply will probably balance demand soon, and that means vacancy rates are probably close to a bottom.
Read more at http://www.calculatedriskblog.com/2014/05/apartments-supply-and-demand.html#rdH8T3zHEXDyhmaf.99

New supply will probably increase by 250,000 to 260,000 units this year - and increase further in 2015 since it can take over a year from start to completion for large complexes.  Note: This doesn't include houses converted to rentals - and that is a substantial number in recent years.

Read more at http://www.calculatedriskblog.com/2014/05/apartments-supply-and-demand.html#rdH8T3zHEXDyhmaf.99

UDF IV Listing

United Development Funding IV, a mortgage REIT, plans to list its shares on Nasdaq, under the symbol UDF on June 4, 2014.  In a show of optimism for its list price, UDF is offering to purchase up to $35 million of shares through a tender offer at $20.50 per share.  UDF sold its shares to investors at $20.00 per share. 

ARCP Happenings

Yesterday, May 21, 2014, American Realty Capital Properties (ARCP) announced that it was selling its multi-tenant shopping centers to affiliates of private equity giant Blackstone (BX).  Here is a Bloomberg article.  The all-cash $1.98 billion transaction is expected to close withing thirty days.  ARCP had originally planned to spin-off the shopping centers into a separate company.  ARCP plans to use a large portion of the  $2 billion to complete the acquisition of the 500 Red Lobster properties it agreed to acquire last week for $1.5 billion. 

Separately, ARCP filed yesterday to issue 100,000,000 shares of common stock.  Today, ARCP announced that it sold 120,000,000 shares at $12.00 per share, bolstering its balance sheet by an additional $1,440,000,000 before fees.  ARCP plans to use a portion of the proceeds to repay debt.

Stuyvesant Town - Peter Cooper Village

Here is an update to a story I linked to last week.  It looks like the four-year drama surrounding the massive Stuyvesant Town - Peter Cooper Village apartment complex coming to a fast close.  The article is a tutorial in various forms of complex real estate finance.

Know The Brand

WP Carey's (WPC) CEO, Trevor Bond, made an interesting comment on WPC's May 8th earnings call, which I read in the call's transcript.  In response to a question as to whether WPC is planning a CPA 19 (Corporate Property Associates 19), Mr Bond said this (my emphasis):

Well, it's a great question. We have no -- nothing filed now with the SEC and nothing on the works. I think that we like the optionality going forward of having the ability to delay the CPA:19 as long as we need to. We'll think more about that as we get to the end of the investment period for CPA:18. We have a modest amount of capital still left in CPA:17, and so CPA:17 and CPA:18 are co-investing on some deals. And I think that from management's point of view, the risk of not having a CPA:19 tied up is not a problem because we can always shift deal flow toward W. P. Carey Inc. if we're ever in a period where we are out of the market. And I think that would then further our goals of growing our balance sheet because the transactions that worked for the funds are clearly going to be very accretive for W.P. Carey Inc. And so it's something that has -- as we get closer to the end of the investment period for CPA:18, we'll be faced with that decision. I'll also say that now that we focused -- we are focusing on creating new products silos for our investment management platform, the Hotel fund which has been successful to date is one example. We also have an active self-storage business as you know, which is folded into the CPAs, but we could have a separate fund for them. And then we're always considering other product silos with capable experienced sponsors and other product types. And so I think that it's probably better for us to focus more on that type of new product, really, in the medium term, to enhance the value of our platform. And so that will continue to be one of our areas of focus.

So, WPC is thinking of not immediately offering another REIT in its flagship CPA brand.  WPC may just buy properties directly.   I have no doubt WPC, with its $6.2 billion market capitalization, could acquire accretive properites, and do it cheaper than a CPA REIT.   I'm less optimistic about the larger implications to the non-traded REIT industry of this possible WPC product exit. 

Broker / dealers sell WPC products because of its CPA programs and their history of regular income and long-term performance.  WPC's hotel deal has raised a moderate amount of capital, but CPA 18 raised more equity over the last six months than the hotel deal has raised in nearly four years.  Brand is important, and WPC's brand is Corporate Property Associates - which are sale/leaseback REITs -  not a hotel REIT, not a self-storage REIT, and not whatever new product it develops. 

WPC, through its CPA REITs, offers real competition to the ARC / Cole non-traded REIT machine.   WPC now appears ready to cede market share to ARC at a time when quality REIT options are shrinking.  If it thinks it can create new products, or stop selling or delay the next CPA program and maintain market share, WPC is misjudging its brand and the competitive environment. 

Tender Offers - Part II

I noted last week that American Realty Capital Healthcare Trust's tender offer was five times over subscribed.  American Realty Capital's other April listing, New York REIT (NYRT), announced the results of its listing tender offer earlier this week.  The REIT was able to accept all 12.9 million tendered shares, which was just over half the 23.3 million shares the REIT had offered to purchase. 

Reads

It's been a long while since I linked to articles worth reading.  Here are three articles that I've read the past few days that are worth a quick read.

The first is a New York Times article on the 11,000-plus unit Stuyvesant Town - Peter Cooper Village in Manhattan.  I have blogged about this property before, and it's sale from 2006 is still making news.

The second is from Morningstar.com and discusses business development companies (BDCs).  The article is in the form of a Q&A and mainly relates to listed BDCs, but some of the quotes in the article pertain to all BDCs, whether listed or non-traded.

The final article is from the Wall Street Journal and talks about the non-bank banks that are financing real estate.  I only see these firms gaining strength and capital in the coming years.

Ah, A Perk Of Being Listed

Franklin Square Investment Corp (FSIC) the recently listed business development company, filed a $1 billion shelf registration today, which allows the company to raise capital "through the sale of various securities including common stock, preferred stock, warrants, debt securities or subscription rights in one or more future offerings."  FSIC has more financial flexibility now that it's listed, and appears ready to take advantage of it.

Griffin-American Healthcare Bids

Here is a free Wall Street Journal article on the final four bidders for the non-traded REIT Griffin-American Healthcare REIT II.  Bidders include affiliates of other non-traded REIT sponsors, in particular recently listed American Realty Capital Healthcare Trust (HCT) and a division of Northstar (NRF).  The bidding, according to the article, is expected to conclude within two weeks.  The article states:

The investors, mostly retirees and other individuals, paid between $10 and $10.22 a share from 2009 to 2013. Current offers from the four finalists have topped $12.50 a share, according to people briefed on the price, which would put the company's value at $3.66 billion.

At $12.50 per share, the sale would be a success for investors.  (I'm not sure how the article's author knows that most of the investors in Griffin American Healthcare REIT II are retirees.)  I will watch for filings to see how this potential transaction proceeds.

On a separate matter, the article includes good information on non-traded REIT liquidity events and includes this quote:

This year "is going to be something of a litmus test for nontraded REITs, to see if they can exit quickly into the public market," said Scott Crowe, a portfolio manager with Resource Real Estate in New York, a firm that buys real estate and invests in shares of nontraded REITs on the secondary market. "I think [deals] still make sense in places like the health-care space where there's a long history of those companies trading at a premium" to the value of their assets.

The article fails to mention that Resource Real Estate, in addition to investing in non-traded REITs on the secondary market, also offers its own multi-family non-traded REIT.

Tender Offers

Inland American announced last week that it expanded its original $350 million modified Dutch tender offer and accepted tenders for $394 million shares of its stock at a price of $6.50 per share. The original Dutch tender offer was for between $6.50 and $6.10 per share.  This is the first Dutch tender offer that I have seen related to REITs that has been completed at the highest price.  All others have been at the lowest price in the tender range.  It's amazing how many investors (6.6% of outstanding shares) were willing to bail out of this REIT at a 35% discount.

American Realty Capital Healthcare Trust (HCT) completed its tender last Friday.  HCT skipped the Dutch tender and offered to purchase up to $150 million of shares - or approximately 7.5% of HCTR's outstanding shares - at $11.00 per share.  HCT's tender was five times oversubscribed, so the REIT will purchase the tendered shares on a pro rata basis.

The tender result I am waiting for is Franklin Square Investment Corp's (FSIC) $250 million Dutch tender offer at a price of $10.35 per share to $11.00 per share. 

The Inland American tender offer was not part of a listing liquidity event like HCT and FSIC, but was a mechanism for Inland American to provide some liquidity to investors.

Mind Numbing

Here is complex bankruptcy story, as detailed by Bloomberg.  The Gherkin tower (the building shaped like a football) in London became the highest profile London property bankruptcy since Canary Wharf in 1992.  It looks like the borrower's hedging backfired, causing its liabilities to increase:

Deloitte said in an April 24 statement that the defaults stemmed from the building’s complex, multi-currency capital structure. “Adverse interest rate and currency movements have caused the total senior liabilities secured by the property to increase materially,” the firm said.

Rate swaps allow borrowers to keep payments within a fixed range even if interest rates fluctuate more widely. When rates fall, customers might pay higher costs for the swap to keep payments within the agreed range.

The building, bought for 600 million pounds in 2007, was valued at 473 million to 520 million pounds in 2012.  I can't quite figure the debt, but think it's near 550 million pounds.