Deal of The Year
My deal of the year is the successful listing of the Piedmont Office Realty Trust (PDM).  The former non-traded REIT listed its shares on the NYSE in February around $15 per share, and it's now trading over $20.  While the stock has risen by about a third since its listing, it is still priced about 20% below its break even level of just over $25 per share.  To exisitng investors, PDM is yielding 5% and at today's price is yielding 6.2% - all covered by operating cash flow.  I buy the argument that if an investor bought shares in PDM ten years ago the overall annual return is pathetic.  But that is not why it's my deal of the year.  The stock not only held its value, but increased in value while successfully accessing the capital markets, positioning itself for long-term growth, all the while achieving its objective of giving investors liquidity.

If there is a black cloud around this deal it is its successful listing and the deferred release of shares, which helped maintain PDM's value through lack of sell pressure, and how I expect this will become the listing strategy for other non-traded REITs.  Baring any bad news over the next month, investors in PDM should have full liquidity of all their shares at prices much higher than the initial listing price.  You can bet that other REIT sponsors watched this smooth transition and will plan to replicate the deferred share release structure.  One non-traded REIT, Healthcare Trust of America, has filed initial documents to list its shares and will also offer staged liquidity, but over eighteen months rather than the twelve months of PDM.  Healthcare Trust of America won't be the last sponsor to exploit PDM's success.

Advantages that PDM had, which other REITs likely won't be able to replicate, are that it had low debt (around 20% near the time of listing), a diversified portfolio of office properites acquired before the spike in real estate prices, and a dividend that was covered by operating cash flow.  The large, stable portfolio offered no downside surprises during the twelve-month deferred listing period, or prompted sell pressure as the tranches were opened to the market.   That PDM is still trading below its break even, even with all those positives, should give non-traded REITs sponsors and the firms that sell them something to think about.  But in the meantime, investors and broker / dealers should thank PDM's management, including the often maligned Leo Wells, for the successful PDM listing.

Bluerock REIT Suspends Sales
The Bluerock Enhanced Multifamily Trust, Inc. has suspended sales.  This is not breaking news, as the 8-K announcing the suspension is dated November 11, 2010, and I am just getting around to posting this now.  The reason for the sales suspension is that the REIT changed auditors and the new auditors are saying that the REIT has to change the way it accounts for its investments in its properites, and therefore restate its financial reporting, resulting in a new 10-K and new 10-Qs.  The REIT's properties are all owned through joint ventures with other, affiliated Bluerock entities and third parties.  The REIT needs to file corrected financial statements and a post effective amendment, and be declared effective by the SEC.

I quickly read the Bluerock Enhanced Multifamily Trust's website and saw no mention that it has suspended sales.  I had to go to the REIT's most recent filings with the SEC to find the 8-K announcing the sales suspension.  This REIT, like the Behringer Harvard Multifamily REIT, has substantial inter-dealings with affiliates and owns its properites through joint ventures.  Real Estate funds and REITs that own their properites through Rube Goldberg structures always make me uncomfortable.

Grubb Gets Scrubbed
The Grubb & Ellis Apartment REIT is changing its name to Apartment Trust of America, effective January 1, 2011.  What an awful, uncreative name.  A better name would be the Legacy and Lawsuits Apartment REIT. 

From what I have been able to extrapolate from various conversations is that the managers of the REIT terminated the REITs relationship with Grubb & Ellis due to poor sales, and are hoping that a new advisor and dealer manager will boost sales.  Unfortunately, the change in advisor and dealer manager requires new selling agreements with broker dealers, and the REITs legacy assets and lawsuits relating to pending acquisitions will likely give broker dealers reason to pass on this deal. 

Quote of the Year
This is a quote from a July Cole Real Estate Investments' press release describing its $310 million acquisition of a building leased to Microsoft:

Cole expects the average capitalization rate for this property over Microsoft’s remaining initial lease term to be approximately 7.70%.  

Average capitalization rate over the term of the lease?  That's a new one.  A cap rate is a property's first year net operating income divided by the purchase price.  Period.  The use of "average" tells me that Cole is afraid to tell us that the actual cap rate is low, probably lower than the Cole REIT's dividend (and the Cole REIT did cut its dividend by a small amount late in the year).  Don't insult us with made up terms.  Instead, tell us that while the Microsoft property was expensive, it will likely outperform all the other real estate in the portfolio.  Forward any other worthy quotes.

TIC Article
Yesterday's Wall Street Journal (sorry, no link) had an article about a tenant in common arbitration that ruled that fraud had been committed at an Austin, TX office property syndicated by Triple Net, one of the large TIC sponsors.  The fraud resulted from Triple Net's failure to disclose a structural flaw in the building's foundation and that Triple Net was negotiating an insurance settlement, and then spent a portion of the insurance proceeds on other properties.  The article states that the structural flaw in the building has prevented it from being refinanced and the lender has filed a foreclosure notice. 

The article spends a good deal of space badly trying to tie the Austin property to other high profile TIC frauds, DBSI and Sunwest.  The theme of the article is that the Austin property offered a look into the sinister world of small investor access to commercial real estate.  The article fails here, too.  The throw away line that raised my eyebrows was that Grubb & Ellis, which is managing many of the remaining Triple Net properties due to its merger with Triple Net in 2007, disclosed in its third quarter report that "the company (Grubb) has been named in multiple civil lawsuits related to its investment management programs alleging negligence, fraud and other claims." 

Triple Net's Austin deal sounds more like a property specific situation than an indictment on an industry.  No commercial real estate deal, regardless of size, was immune from the drop in real estate prices.  The general risks of TIC deals were disclosed to investors.  TIC transactions were single property (no diversification) investments.  TIC deals had limited sources for any additional capital, such as for unbudgeted leasing expenses.  No deal expected to have to pay down a mortgage to allow for refinancing.  Most TIC deals had financing that ended up in CMBS, which had their restrictions disclosed, but no one knew how difficult these restrictions would become when the entire CMBS market closed.  Finally, the fees of a TIC transaction usually required a gross property appreciation of at least 15% to 25%, just to break even. 

It is naive to think that TIC deals would be immune from the recession and credit crisis.  The real estate boom was fueled by easy credit, and the TIC boom in particular benefited from the residential housing boom as rental properties were sold and proceeds rolled into TIC properties.  Commercial real estate prices appear to have stabilized, and might even improve with a growing economy.  The next several years will write the final chapter on the TIC industry as mortgages in CMBS mature.

Natural Gas' Frack Problem
Yesterday the New York State Assembly approved a six-month ban on natural gas drilling that uses hydraulic fracturing until the environmental impact of this process is evaluated.  The fear is that the chemicals used in fracking are seeping into and contaminating ground water supplies.  Fracking is the high pressure process used with water and chemicals to force the release of hydrocarbons from rock formations deep in the earth.   Many natural gas drillers use fracking and many don't reclaim the water / chemical cocktail, allowing it to dissipate into the earth.  Articles on natural gas fracking and the NY Assembly vote are here and here.  I am going to go out on a limb here and say that the environmental impact of fracking is a big deal, and that most gas drilling investments I have reviewed are under insured against environmental damage.