Colony and RXR: Make Investors Whole

Dear Colony and RXR,

Your non-traded REIT, NorthStar/RXR New York Metro Income, Inc., at around $38 million in investor capital, is just a speck in both your commercial real estate investment empires.  It is unfortunate that this REIT did not catch on with financial advisors, especially given the quality of the RXR management team and its long-term successful track record.  It's an ugly reality that sometimes financial advisors and their clients find investment funds that pay unsustainable 8% distributions and acquire dubious assets preferable to lower initial distributions and the potential for real long-term value appreciation.

As you know, New York Metro Income has two investments and a net asset value of $8.49 per share.  I read your filing yesterday, August 21, 2018, about your plan to liquidate the REIT's assets through a series of asset sales and internal transactions, and your generous offer to forfeit your shares to increase distributable cash to investors.  I did not, however, after reading the filing several times, note any mention of an intent to return investor capital in full.  I figure, based on a $10.00 per share offer price and the $8.49 NAV per share, that Colony and RXR would need to contribute $5.7 million, or about $2.9 million each to fully return investor capital.  I know that $3 million is not nothing, but it is a small amount to pay for firms of your size, and the goodwill you'd accrue with investors, financial advisors, and the broker dealers that invested with you would be far greater than $3 million.

Sincerely,

Rational Realist

Bad Lenders

This Bruce Kelly article in InvestmentNews on two failed lenders raises some important issues.  The lenders are being investigated for loan fraud. I am not sure if the fraud is from the securities the two lenders sold to investors or the loans they made to small businesses.  For investors that likely lost their entire investment, it does not really matter.  One red-light-flashing issue to me is proper return for appropriate risk. Any investment that is paying 10% for a less than one-year hold period is risky; probably much riskier than the 10% potential return.  Assuming there is no fraud involved, I wonder how many investors would sign up if they were told that there is a better than 50% chance they could lose all their money to get 10%?  Not many. 

The second issue, and again assuming no fraud, is that lending and credit analysis is hard.  It is hard even for the biggest banks, which work in a strict regulatory environment with its own lending guidelines, and which have spent decades honing their credit analysis.  These banks are still far from perfect and they are considered the best.  Big private equity firms and their debt-focused divisions or competitors*, while outside of much of the regulatory environment facing banks, have established their own credit criteria and safeguards, but again these big non-bank money lenders are far from perfect.  Then you get down to firms like the fraudsters in the InvestmentNews article.  I can't imagine these outfits having credit expertise and procedures that approach even the smallest community bank.  Investors had no chance.

*Non-bank banks continue to grow and are an important part of the credit industry.  According to a recent Baron's article, private debt fund managers raised $107 billion in 2017.