More ARCT Listing

Here is a partial screen shot from yahoo.finance of the closing of ARCT's opening day of trading:

I circled the day's trading range.  I wonder who was part of the trade at $5.54, especially the sell side.  Someone took a nearly 50% loss when ARCT has a tender offer to purchase shares at $10.50 per share.  You can't fix stupid.

ARCT Listing

American Realty Capital Trust is now listed on NASDAQ and and began trading this morning under the symbol ARCT. 

Industrial Income Trust Re-Price

The non-traded real estate investment trust (REIT), Industrial Income Trust, filed various documents this week, including an updated S-11, in preparation for its follow-on (continued) equity offering, which will begin as soon as its current equity offering period ends its nearly two-and-a-half year offering period in mid-April.  The follow-on offering is for two years, which will make the combined time the REIT raised equity nearly four-and-a-half years.  Industrial Income's board of directors has determined that the REIT will price its follow-on offering at $10.40 per share, up from the current $10.00 per share price of the initial offering.  Industrial Income's follow-on offering is expected to start on April 17, 2012,  giving Industrial Income's sales force approximately six weeks to stress the benefit of buying shares soon to be offered at $10.40 for only $10.00. 

The following is from Industrial Income's Supplement 16 and describes the methodology behind new share price:

Our board of directors arbitrarily determined the offering price in its sole discretion and is ultimately and solely responsible for establishing the fixed offering price for shares of our common stock in the Follow-On Offering. We did, however, engage the services of Duff & Phelps LLC (“Duff & Phelps”), an independent valuation firm, to conduct an appraisal of all of our real estate assets that had been acquired prior to the fourth quarter of 2011. For our assets acquired during the fourth quarter of 2011, Duff & Phelps did not prepare an appraisal but did review each of those properties and concluded that the acquisition prices approximated market value.

Our board of directors also considered certain other factors, including: a discounted cash flow analysis; comparisons against certain publicly-traded industrial REITs with respect to certain operating and financial metrics including occupancy levels, leverage ratios and debt terms, and concentration of properties in top tier markets; the quality and diversity of our properties and tenant base; and the progress in executing our overall investment strategy. However, our board of directors did not consider certain other factors, such as an aggregation premium for the properties in our portfolio or a liquidity discount. Our board determined that the aggregate value of all of our real estate assets, as of December 31, 2011, is approximately $1,162,700,000 (after adjustment for our 51% ownership interest in our existing unconsolidated joint venture). Our board’s valuation for the real estate assets that had been appraised by Duff & Phelps was consistent with the Duff & Phelps’ appraisal. This compares to an original aggregate purchase price (exclusive of transfer taxes, due diligence expenses, and other closing costs) of $1,067,800,000 for these assets. Based on 60.55 million shares outstanding as of December 31, 2011, this appreciation of our real estate assets reflects an implied increase in value of approximately $1.57 per share.

A $1.57 per share increase in real estate asset value, that's nice.  I like how the board included the REIT's "progress in executing our (the REIT's) overall investment strategy" as part of its valuation decision.    According to Industrial Income's third quarter 2011 10-Q, the REIT has never paid any of its distribution in operating cash flow, and the following is from a footnote in the third quarter 2011 10-Q:

For the three months ended March 31, 2010 and June 30, 2010, 100% cash distributions provided by financing activities were funded through offering proceeds. For all other periods presented, 100% cash distributions provided by financing activities were funded through proceeds from our debt financings.

I hope the Industrial Income's board weighed in its valuation decision this REIT's historic inability to pay any of its distribution from operating cash flow.  This is one metric I will follow in 2012.

Washington Slipping

Here is a free Wall Street Journal article on Vornado Realty Trust and its problems due to a weakening commercial real estate market in Washington DC.  I didn't know this market was softening because along with New York and Boston, Washington DC is always listed as one of the strongest real estate markets in the country.  I found these paragraphs interesting:

But Washington's engine of growth has been the federal government. As pressure builds on the government to rein in spending, landlords are getting pinched.

Vornado, a Paramus, N.J.-based real-estate investment trust, declined to comment.

The company's release said 1.1 million square feet was vacated because of a military consolidation program overseen by the Defense Base Closure and Realignment Commission. Vornado projected another 539,000 million square feet will be vacated by the end of 2015. Most of the properties hurt by the program are in Northern Virginia.

Vornado is recommending that seven Northern Virginia properties that secure $600 million of debt go to a special servicer.  Despite the downbeat tone of the article, its states that Washington DC still has the lowest vacancy in the country at 9.4%. 

Grubb & Ellis' Sale and Bankruptcy

Grubb & Ellis sold its assets and entered into a prepackaged bankruptcy yesterday.  Here is a LA Times article on Grubb & Ellis' filing along with historical information on Grubb & Ellis as a company.  Hindsight is always clear, but it's hard to argue that the $725 million price that NNN Realty Advisors paid for Grubb in 2007 didn't signal commercial real estate's market top.  According to the LA Times article, Grubb is selling its assets to Newmark Knight Frank, which itself was bought by New York finance firm BGC Partners in October of last year.  A quote from the article:

"Following a thorough and rigorous process and the evaluation of all available options, we determined that a partnership with BGC provides the best platform for our brokerage professionals, employees and clients," said Thomas P. D'Arcy, chief executive of Grubb & Ellis.

"We believe the transaction will be seamless for our clients, and we expect no disruption to the company's operations. Furthermore, we believe our professionals and clients will benefit greatly by being part of the BGC organization, which, with its recent acquisition of Newmark Knight Frank, will bring together two strong brands to create a powerhouse in the commercial real estate space."

There was no mention of the status of Grubb & Ellis' current financial partners, Colony Capital and C-III, both of which invested in Grubb & Ellis over the past year.  BGC Partners, according to this New York Times Dealbook blog post, shares its CEO with Cantor Fitzgerald.

Oil and Gas Articles

There were two oil and gas articles in last Sunday's Los Angles Times.  The first discusses the strain that the fracking debate is having on a community in Upstate New York.  The second details Texans fighting eminent domain for TransCanada's Keystone XL pipeline.  

ARCT Listing

If you'd been listening it wasn't a bombshell, if you were incredulous it was a shock.  American Realty Capital has been saying for over a year that it was going to list the shares of its $2.1 billion REIT, American Realty Capital Trust (ARCT), as soon as reasonably possible after the REIT closed its equity offering.  It's an understatement to say I was skeptical about a quick listing, call me Captain Incredulous.  Early last week ARCT thumbed its nose at the doubters and filed an S-11 announcing its intention to list on NASDAQ on or near March 1, 2012, under the symbol ARCT.  ARCT closed its equity offering period in July 2011, and the speed with which ARCT has gone from non-traded to a pending listing is the quickest I can remember for a non-traded REIT.  Typically, before a non-traded REIT discusses liquidity options, it will have a minimum hold period of five to seven years from the date it closes its offering, and this this is a loose estimation, as a REIT's board can extend hold periods.  ARCT's quick path to liquidity will pressure other non-traded REIT sponsors to offer the same fast turnaround.

As part of ARCT's listing, it is internalizing its advisor and waiving fees, including any internalization fees.  An internalization fee has historically been a non-traded REIT sponsor's big payday, and is where the listing REIT, with the benevolence of investor capital, buys its external advisor, using REIT stock as currency.  The price the REIT pays for its advisor is the internalization fee, and historically this fee has run into the hundreds of millions of dollars.  The advisor typically determines its value (internalization fee), and than has the REIT pay for a third party "fairness" opinion that confirms the value.  Internalization fees have been under pressure for several years and typically trigger lawsuits from angry investors, the defense of which is paid for by the REIT.   (No comments, please, on Leo Wells $170 million internalization fee.   Although it has received the most press, it wasn't the most egregious internalization fee (other non-traded REITs had higher internalization fees both in term of dollar size and as a percentage of equity raised), it wasn't $170 million, and Leo Wells didn't pocket the entire amount of the internalization fee.)   I hope that ARCT's high-profile move to waive the internalization fee will put an end to this fee once and for all.

ARCT is not the first non-traded REIT to waive internaliztion fees.  Healthcare Trust of America waived its internalization several years ago when it internalized its advisor.  It too has filed an S-11 but has not yet listed on an exchange.   The large stock grants HTA keeps bestowing on its executives, to me, has made a joke of its ballyhooed internalization fee waiver.

ARCT will pay its advisor a 15% Subordianted Incentive Listing Fee (promote), which only gets paid if ARCT's stock trades above $9.81 per share 180 days from listing.  The S-11 desecibes the listing fee as follows:

"In connection with the listing of our common stock on NASDAQ, ARC or its affiliate will be entitled to a subordinated incentive listing fee equal to 15% of the amount, if any, by which (a) the market value of our outstanding common stock plus distributions paid by us prior to listing, exceeds (b) the sum of the total amount of capital raised from stockholders during our prior continuous offering and the amount of cash flow necessary to generate a 6% annual cumulative, non-compounded return to such stockholders. For this purpose, (i) the market value of our common stock will be calculated based on the average market value of the shares issued and outstanding at listing over the 30 trading days beginning 180 days after the shares are first listed."

Most, if not all non-traded REITs have a similar incentive listing compensation feature, but I have tended to gloss over it as few sponsors ever were in a position to earn it.  ARCT, according to an article in InvestmentNews, expects its stock's offer price upon listing to be $11.50.  ARCT's listing price is obviously unknown at this time, and its underwriter won't set a price until right before ARCT share are listed.  Once ARCT is listed its price will vary daily depending on the market.  ARCT's advisor gets its listing fee if, after 180 days,  the previous thirty-day average stock price is above $9.81.  If ARCT is able to execute its business plan and the stock trades above its original $9.81, it makes the loss of the internalization fee much less painful.   ARCT management has an incentive to perform because the higher ARCT's stock price, the more money that is paid to the advisor.   As investors make money so does ARCT.   The S-11 states that for each $.25 increase in ARCT stock price, the incentive listing fee will increase by $6.7 million.  The REIT will pay the listing fee, if any, in the form of a non-interest bearing three-year note.

Don't worry about bumping into ARC executives at the poorhouse due to a lack of internalization fee.  Upon listing, ARCT's chairman has 934,159 shares (received in stock grants from the REIT) that fully vest, and at $11.50 per share target price this is more than $10.7 million.  ARCT's president will have 212,370 shares vest upon listing, which at $11.50 is $2.4 million.  Other executives have shares that will vest upon listing.

The way I read the S-11 is that all ARCT shares will immediately be liquid upon listing.  This is a departure from recent non-traded REIT listings and filings where share releases to investors were deferred and provided liquidity over extended periods, typically twelve to eighteen months.  Immediate liquidity is favorable to investors, and hopefully the short listing period will inhibit unnecessary sales and downward pressure on prices.  ARCT is having a short-term tender offer period to help defuse sale pressure.  Any financial advisor that recommends selling ARCT shares to "reinvest" in another non-traded REIT is doing so only to earn another commission.

If ARCT trades at a premium to the $10 price investors paid for their shares it will be quite a coup for ARC management and, I suspect, a boon to its other non-traded REITs still in their offering period.   It will put pressure on other non-traded REIT sponsors to try and replicate the process - fast listing and working for the promote.  A successful listing (stock price trading at premium to the price investors paid for their shares) should kill the internalization fee for future non-traded REIT listings.

Mind Boggling

Apple's stock broke $500 per share yesterday.  This Tech Crunch blog post may explain why.  In 2007, Apple's emerging market sales were $1.7 billion.  In 2011, emerging market sales were $22 billion, and Apple CEO Tim Cook says Apple is "only on the surface" in emerging markets. 

BDC Scrutiny

InvestmentNews had an article yesterday on regulatory interest in Business Development Companies (BDCs).  This is not a shock giving the amount money flowing into this sector, especially to Franklin Square's BDC.  People need to remember that BDCs are high yield investments with non-credit borrowers.  Non-credit doesn't mean bad credits.  BDCs should be viewed like junk bond funds, not some newly discovered income-generating nirvana. 

Name Change and an Objective Change

CNL Properties Trust today announced that it not only changed its name, but its investment objectives, too.  It is now CNL Healthcare Trust, and will focus on:

The real estate investment offering intends to build a portfolio containing senior housing facilities and a range of healthcare properties, potentially including assisted living and memory care facilities, medical office buildings and continuing care retirement communities as well as it may also acquire other income-producing assets.

The REIT previously was targeting lifestyle and lodging assets, in addition to senior housing.  The REIT specified its first property acquisitions in late December 2011, a portfolio of five senior housing properties, but this transaction has not yet closed.

CNL Healthcare Trust directly enters the competitive healthcare non-traded REIT market, and will compete for assets with American Realty Capital Healthcare Trust and Griffin-American Healthcare REIT II.  Other non-traded REITs seem to keep buying healthcare assets, too, even though healthcare is not their primary target asset class.  In addition, Healthcare Trust of America is still a presence in the market place.

Name Change

American Realty Capital II, LLC, the sponsor of nine non-traded REITs, has changed its name to AR Capital, LLC.  Here is yesterday's press release I saw on my Google News feed.  I like the new name better.  I have always been confused about the "II," and wondered what ever happened to the "I."

Natural Gas Reverse Stock Split

Here is an interesting post on the Financial Times Alphaville blog, on natural gas ETF, United States Natural Gas Fund (UNG).  Because of the low price of natural gas, the EFT is going to have a four-for-one stock split to boost the price of the EFT.  

Atlanta Foreclosure

Here is a good article from Bloomberg on the foreclosure of the Bank of America Tower in Atlanta.  It is the tallest building in the South, and while completely trivial, the tallest building to face foreclosure since the credit market collapsed in 2008.  The article is full of good facts, not only about Atlanta, but also about CMBS.  I didn't know the information in this paragraph:

It’s (Atlanta) now squarely in the bust category with the highest rate of late payments for loans on offices bundled into bonds among the largest U.S. metropolitan areas, at 25.3 percent, according to data compiled by Bloomberg. That’s increased from 10.4 percent a year ago and is more than triple the 7 percent national rate. The rate for payments 60 days late or more was higher than Cleveland at 23.4 percent and Phoenix at 23.3 percent, the data show.

The property was purchased in 2006 for $436 million, the $363 million loan matured in December, and the property was appraised last March at $202 million.  

Say What?

Here is an example of double-speak gobbledegook from an Inland Western 8-K/A filing:

In light of these results, the Company has determined to hold an advisory vote on named executive officer compensation every year until the next advisory vote on the frequency of future votes on named executive officer compensation.

Ok, that's a head-scratching, confusing jumble of words.  It is also meaningless.  The REIT is allowing shareholders an advisory vote on executive compensation.  Advisory votes are just that, advisory.  The votes are non-binding and don't impact any actual compensation.  Here's my advisory recommendation:  no named executive should get any salary increase until Inland Western's current $6.95 share price is increased and becomes equal to or greater than the price investors originally paid for their shares. 

TIMMMBER!!!

If fees fall in a forest, do they make a sound?  Yes.  It's a slow-building, rumbling sound that will echo for some time.  Wells Timberland REIT filed an 8-K on Tuesday, January 24th, where it quietly announced that its advisor, Wells Timberland Management Organization, LLC (Wells TIMO) had permanently "discharged" $25.1 million in accrued and unpaid management fees and expense reimbursements.  These fees and expenses had accrued due to lender restrictions that were part of the debt Timberland REIT utilized to acquire its timber assets.  These fees had been a drag on this REIT because the fees were in a priority position to investor capital.  At September 30, 2011, the REIT had $27.3 million Due to Affiliates, of which $24 million was advisor fees and reimbursements payable to Wells TIMO.

The fee forgiveness is positive for investors and the right decision by Wells.  The REIT will continue to pay fees to Wells TIMO, but lender restrictions have been lifted due to debt paydown, and future fees will be paid as incurred, and not accrue any more. 

(Forest picture from Google Images and the website ecoeternity.com and is no relation to Wells Timberland REIT.)

Commercial Mortgage Refinancing

Here is a must-read article on commercial mortgage refinancings from Bloomberg.  The article's premise is that mortgages in strong real estate markets, in particular Manhattan, are able to get refinanced, while properties in smaller markets get less lender consideration.   The article used a Vornado-owned Manhattan property's $430 mortgage as a refinance example.  One fact that doesn't make it in the article's introduction is that Vornado paid the mortgage down by $130 million, which of course made the refinance easier.  This level of mortgage paydown would have allowed a refinance in most markets.  The question is in how many markets are property owners going to be willing to add that much equity to refinance a property?  For markets that have not recovered and owner equity gone, I suspect most property owners will take their chances with special servicers rather than putting in additional equity.

The article makes reference to Linen & Things, which I mentioned yesterday (emphasis added):

That may not be enough to bail out the Baybrook Gateway Mall in Webster, Texas, 22 miles (35 kilometers) northwest of Houston. 

A $41 million mortgage on the shopping center, originated by Goldman Sachs Group Inc. in December 2006 and sold as part of a commercial-mortgage bond deal two months later, was handed over to a firm that handles troubled loans because the borrower couldn’t refinance debt that matured this month, according to Fitch Ratings. So-called special servicers determine whether to modify loan terms or foreclose on property owners struggling to make payments.

Baybrook, co-owned by Blackstone Group LP’s Brixmor Property Group Inc. and JP Morgan Chase & Co., is currently working with the special servicer to resolve the finances, Stacy Slater, a spokeswoman for Brixmor, said in a telephone call. The mall lost tenants, such as Linens ‘n Things Inc. which filed for bankruptcy in 2008, she said, declining to comment further.

The article references a property in KBS REIT I that defaulted on its mortgage on January 11th.  I have not yet seen a KBS REIT I filing on this (but I am not sure whether it has to make an 8-K filing).  Here is the paragraph from the article:

A $43.5 million mortgage on One Citizens Plaza, a 224,089 square-foot office building that houses the headquarters of Citizens Financial Group in Providence, Rhode Island, also ran into trouble this month before its Jan. 11 maturity date, according to Fitch. Though the building was 98 percent occupied as of September, the borrower didn’t repay the mortgage originated by Wachovia Corp. in 2006, Bloomberg data show.

“We are just beginning communications with the lender about this loan,” said David Snyder, chief financial officer of KBS Realty Advisors, a private-equity real estate investment company in Newport Beach, California that owns the property. “At this juncture we are unable to predict the outcome,” he said in an e-mail.

There is other good information in the article including noting that the market for CMBS has recovered to its levels of last July, which means new origination.

It's Good To Be King

I just saw this Bloomberg article about Blackstone receiving $6 billion in commitments (on its way to $10 billion) for its latest real estate fund, Blackstone Real Estate Partners VII, which will focus on distressed real estate.  The $6 billion is not far from the total amount that non-traded REIT sponsors raised in all of 2011.

Private Equity Explained

Here is an excellent article from The New Yorker explaining private equity - good and bad.  (If the link doesn't work, the author is James Surowiecki.)  There has been plenty of misinformation the past few weeks related to private equity.  The job creation issue is tackled here:

Given the weak job market, it makes sense that the attacks have focussed on layoffs. But the real problem with leveraged-buyout firms isn’t their impact on jobs, which studies suggest isn’t that substantial one way or the other. A 2008 study of companies bought by private-equity firms found that their job growth was only about one per cent slower than at similar, public companies; there was more job destruction but also more job creation. And, while private-equity firms are not great employers in terms of wage growth, there’s not much evidence that they’re significantly worse than the rest of corporate America, which has been treating workers more stingily for about three decades.

Here is an example of the "bad" private equity: 

In 2004, for instance, Wasserstein & Company bought the thriving mail-order fruit retailer Harry and David. The following year, Wasserstein and other investors took out more than a hundred million in dividends, paid for with borrowed money—covering their original investment plus a twenty-three per cent profit—and charged Harry and David millions in “management fees.” Last year, Harry and David defaulted on its debt and dumped its pension obligations. In other words, Wasserstein failed to improve the company’s performance, failed to meet its obligations to creditors, screwed its workers, and still made a profit. That’s not exactly how capitalism is supposed to work. 

The people who ran Harry and David into the ground have a defense: economic conditions changed in unforeseeable ways. But that’s precisely why loading firms with debt in order to reap short-term benefits is bad. It leaves companies unable to weather tough times, and allows private-equity firms to make money even if things go wrong.

As if this weren’t galling enough, taxpayers are left on the hook. Interest payments on all that debt are tax-deductible; when pensions are dumped, a federal agency called the Pension Benefit Guaranty Corporation picks up the tab;

 

Many landlords that had private equity tenants (Mervyn's, Linen & Things, Steve & Barry, etc.) were impacted by similar tactics and were left with empty space when the retailers could not survive an economic slowdown due to their leveraged capital structure.

Profile In Courage

Here's an article from InvestmentNews on Behringer Harvard.  This sentence stood out to me:

Meanwhile, other broker-dealers — including FSC Securities Corp., Royal Alliance Associates Inc. and SagePoint Financial Inc., which constitute the American International Group Inc.'s Advisor Group — stopped selling the Multifamily REIT last summer when its offering period ended, according to spokeswoman Linda Malamut.

Is stopping sales when a deal closes its offering period really stopping sales?  Hasn't the bird flown, or the cows left the barn, or the fat lady sung, or the lights been turned off because the party's over?  The answers, of course, are No and Yes.  AIG didn't stop sales and sold Behringer Harvard through the end of its offering. Period.

Behringer Harvard Multifamily's distribution overpayment was no secret.  Multifamily neatly presented this fact every quarter throughout its long offering period.  This was a better story two years ago when broker / dealers had an actual decision to make.

I think a better question is what are broker / dealers doing now about other non-traded REITs that are two and three years into their offering periods and not making any headway towards covering their distributions.  Like Multifamily, these REITs disclose quarterly their inability to adequately fund their distributions. 

Cherry Picking Housing Data

I believe the worst of the housing crisis is behind us and and am now a housing bull.  I look for data to support my opinion (and am skeptical of data that doesn't!).  I saw this stat this morning on the indispensable Calculated Risk website.  Housing completions in 2011 were the lowest since record keeping began in 1959.  Here is the quote:

Single family starts were down 9% in 2011 to 428,600. This is the lowest level of single family starts since the Census Bureau started tracking starts in 1959!

The entire post is worth reading.  Low supply is good for prices. 

Natural Gas Leak

I posted on January 9th about the disconnect between the price for shale acreage and natural gas prices.  Natural gas was $3.00 per mmbtu at the time of the post.  Today I see that NYMEX Henry Hub natural gas futures are under $2.35 per mmbtu.  I'm not sure what's behind the plunge.

Update:  Here's a CNBC article on why natural gas prices are falling.  Basically a warm winter and plenty of supply.

Rolled Over by Leases

The Wall Street Journal had a good, free article yesterday on the problems facing some office real estate, as leases signed at the peak of the real estate boom are expiring.  Landlords are faced with a market with lower lease rates:

Rents in most markets are still well below what they were in 2007, with the drop in some areas as much as 26%, according to data firm Reis Inc. Because of the weak market, landlords with empty space or expiring leases also have to spend large amounts on incentives to attract tenants, like free rent and interior work.

Offices that were purchased near the peak with a corresponding five-year mortgage have a compound problem.  It's difficult to refinance a mortgage when faced with lower rents and a higher vacancy rate.  The article states that defaults and foreclosures are rising for office space, and are expected to continue to rise, while real estate property types that able to adjust rents, like apartments and hotels, are seeing drops in foreclosures. 

The article lists major metropolitan markets like New York, Washington DC, and Boston as exceptions, as values in these markets have increased.   The article is worth reading and has plenty of examples.

Worrying Disconnect

Here is a Bloomberg article on the record prices being paid for shale drilling acreage.  Here is a telling paragraph from the article:

Marubeni Corp. (8002), the Japanese commodity trader, last week agreed to pay as much as $25,000 an acre for a stake in Hunt Oil Co.’s Eagle Ford shale property in Texas. The price, which includes future drilling costs, exceeds the $21,000 an acre Marathon Oil Corp. (MRO) paid last year for nearby prospects owned by KKR & Co. (KKR)’s Hilcorp Resources Holdings LP. In the Utica shale of Ohio and Pennsylvania, deal prices jumped 10-fold in five weeks to almost $15,000 an acre, according to IHS figures.

The article details industry justification for the high prices and explains why prices may go higher.  Demand from foreign oil companies wanting access to US gas acreage is helping push up prices for shale gas acreage.

The record prices are against a backdrop of natural gas near $3.00 per mmbtu.  The price per mmbtu has been trending down for over a year, dropping more than 33% in value.  The chart below is one year's natural gas futures prices from WTRG.com:

The disconnect between the prices oil companies are paying for acreage and the current price for natural gas is alarming.  It's important to remember that shale gas plays involve hydraulic fracking, which is an expensive form of gas extraction.  I don't see how the disparity can continue, either natural gas is poised for a big run, or acreage is going to get much cheaper.

Non-Traded REIT Fodder

Non-traded REIT sponsors use the high correlation of publicly traded REITs to the stock market as a reason to invest in non-traded REITs (since of course non-traded REITs don't trade so they can't correlate with stock market movements).  Below are two graphs I saw over the weekend that show correlations between various asset classes and the S&P 500.  The graphs are from the website The Reformed Broker, which reprinted the data from Factor Advisors.  The correlation of many asset classes has increased over recent years, including traded REITs, giving a twisted credence to a non-traded REIT marketing point.

I suspect we'll be hearing more about the high correlations between the S&P 500 and publicly traded REITs.

Big Deal or No Big Deal?

I worked my way through Griffin-American Healthcare REIT II, Inc.'s (GARH) new prospectus after reading last week's InvestmentNews article on American Realty Capital's attempt to nominate an alternative board of directors to GAHR's board.  I did not see any additional references to the alternative directors other than the language on which the InvestmentNews article was based, which I have reprinted below:

Notice of Stockholder Intent to Nominate Directors

We have received correspondence from a stockholder and another individual notifying us of their intention to nominate an alternative slate of directors for election at the 2012 annual meeting of stockholders. The notices, which are substantially the same, name persons associated with one or more entities related to American Realty Capital, one of our competitors, as proposed nominees. The notices also identify such entities, and certain individuals associated with such entities, as “stockholder associated persons,” which in this case means that such persons are acting in concert with the individuals who submitted the notices.

The above was listed on page 135 of a 220-plus page document.  Is the nomination of an alternative slate of directors a big deal, or just a competitor trying to complicate GAHR's transition to a new advisor and sponsor.  I will have to wait and wade through additional filings to get an answer.  I just hope the next update, if any, is not a small paragraph in the middle of a 200-page legal document.  (GARH filed an updated prospectus this morning, and the language read the same as last week's filing.)

Temperature Rises In Healthcare Battle

I noted last month that American Realty Capital Healthcare Trust made an unsolicited offer for Grubb & Ellis Healthcare Trust II (which has now changed its name to Griffin-American Healthcare REIT (GAHR)), which was rejected by GAHR's board.  It appears that American Realty Capital Healthcare Trust has not abandoned its pursuit of Griffin-American.  Here is an InvestmentNews article on the latest developments.  The article was based on a GAHR filing.  Here is a quote from the article, taken directly from GAHR's filing:

“We have received correspondence from a stockholder and another individual notifying us of their intention to nominate an alternative slate of directors for election at the 2012 annual meeting of stockholders,” the company said in the filing.

“The notices, which are substantially the same, name persons associated with one or more entities related to American Realty Capital, one of our competitors, as proposed nominees,” according to the filing. “The notices also identify such entities, and certain individuals associated with such entities, as ‘stockholder associated persons,' which in this case means that such persons are acting in concert with the individuals who submitted the notices.”

I wrote last month that I wouldn't have been surprised if this fight escalated.  It looks like I was right.

GBE Delisting

Grubb & Ellis Company (GBE) was notified yesterday by the New York Stock Exchange that its shares will be suspended on January 6, 2011 and the NYSE will begin the process of delisting GBE's stock.  Here is the language from the 8-K:

On January 3, 2012, the New York Stock Exchange (the "NYSE") notified Grubb & Ellis Company (the "Company") and issued a press release that NYSE determined that trading on the NYSE of the Company's common stock should be suspended prior to the opening on January 6, 2012, and that it intends to begin the process to delist the Company's common stock. The NYSE notified the Company that it was not in compliance with the NYSE's continued listing standard that requires the Company's average global market capitalization to be at least $15 million over a consecutive 30-trading-day period.


The Company intends to appeal the NYSE's determination. In accordance with the NYSE policies, the NYSE will not take any additional action to pursue delisting of the stock until the appeal has been fully exhausted in accordance with the NYSE procedures.

Effective January 6, 2012, the Company's common stock will trade on the OTCQB Marketplace under the symbol yet to be determined. The transition of the Company's stock to the OTCQB Marketplace will have no effect on the Company's shares and Grubb & Ellis' shareholders remain owners of the common stock and will be able to trade the stock on the OTCQB Marketplace as of January 6, 2012. In addition, the transition to the OTCQB Marketplace does not change the company's obligation to file periodic and other reports with the Securities and Exchange Commission under applicable federal securities laws.

The Company had previously fallen below the NYSE's continued listing standard for average global market capitalization over a consecutive 30 trading day period of less than $50 million and latest reported shareholders' equity of less than $50 million as well as the average closing price of less than $1.00 over a consecutive 30 trading day period. The Company's business plan to address these issues was previously accepted by NYSE Regulation, however the NYSE has decided to that the Company's business plan is not sufficient to also bring the Company into compliance with the continued listing standard of an average global market capitalization of at least $15 million over a consecutive 30-trading-day period. The notice of suspension received from the NYSE does not currently impact the Company's obligations under its outstanding debt or preferred equity securities.

HTA Largess

Healthcare Trust of America's executive team had a lucrative Happy New Year.  In Form 4s filed yesterday, four HTA executives received generous stock grants on on January 1, 2012.  The CEO received 75,000 shares, the CFO received 50,000 shares, the EVP of Acquisitions received 50,000 shares and the EVP of Asset Management received 40,000 shares.  At the current $10 per share price, this translates to grants valued at $750,000, $500,000, $500,000 and $400,000, respectively, for each of the four executives.  HTA is paying a 7.25% annual distribution and the four executives will all earn the full distribution on their new shares, which ranges from $54,375 annually for the CEO, to $29,000 annually for the EVP of Asset Management.  

HTA has granted stock before.  Below are the cumulative shares (listed in the Form 4s filed yesterday) for each of the four executives, the value at $10 per share, and the annual income the shares generate to the executives at the current 7.25% distribution rate:

	Shares	Value	Annual Income
CEO	460,000	$4,600,000	$333,500
CFO	201,529	$2,015,290	$146,109
EVP - Acq	217,148	$2,171,480	$157,432
EVP - Asst Mgt	65,000	$650,000	$47,125

Since the stock grant occurred on January 1, 2012, it will not be listed in HTA's 2011 10-K, which will be released in March or April.  HTA, as of September 30, 2011, is still not generating enough operating cash flow to cover its current distribution.  HTA generated $86,260,000 in operating cash flow for the first nine months of 2011, while it paid distributions of $119,621,000 over the same period; so operating cash covered about 72% of HTA's paid distribution.

More Housing

Yesterday, the National Association of Realtors (NAR) revised down its benchmark sales and inventory figures for 2007 to 2010, reducing total homes sold by 710,000.  This downward revision means that the housing crisis was actually worse than thought (and I thought it horrible).  Going forward, it also means that future sales numbers will be benchmarked against a smaller number, making housing market comparative sales figures look better than they would have been without the revision. 

Housing Bull

I am bullish on housing.  I say this as someone who was a housing bear through much of the early 2000s.  My bullishness is based on a couple of simple premises, mainly that low new housing stock, falling existing housing supply, and improved employment will boost housing demand and home prices.  The last four years have had the lowest number of housing units added in any years since 1990 (which is as far back as the data I saw went).  Before 2009 there had never been less than 1 million units added annually.  Only 425,000 new units will be added to existing housing stock in 2011, which is the lowest of any of the last twenty years.  I encourage you to look at this post from Calculated Risk, and I have copied the table below: 

Housing Units added to Stock (000s)
	1 to 4 Units	5+ Units	Manufactured Homes	Sub-Total	Demolitions / Scrappage	Total added to Stock
1990	1010.8	297.3	188.3	1496.4	200	1296.4
1991	874.4	216.6	170.9	1261.9	200	1061.9
1992	999.7	158	210.5	1368.2	200	1168.2
1993	1065.7	127.1	254.3	1447.1	200	1247.1
1994	1192.1	154.9	303.9	1650.9	200	1450.9
1995	1100.2	212.4	339.9	1652.5	200	1452.5
1996	1161.6	251.3	363.3	1776.2	200	1576.2
1997	1153.4	247.1	353.7	1754.2	200	1554.2
1998	1200.3	273.9	373.1	1847.3	200	1647.3
1999	1305.6	299.3	348.1	1953	200	1753
2000	1269.1	304.7	250.4	1824.2	200	1624.2
2001	1289.8	281	193.1	1763.9	200	1563.9
2002	1360.1	288.2	168.5	1816.8	200	1616.8
2003	1417.8	260.8	130.8	1809.4	200	1609.4
2004	1555	286.9	130.7	1972.6	200	1772.6
2005	1673.4	258	146.8	2078.2	200	1878.2
2006	1695.3	284.2	117.3	2096.8	200	1896.8
2007	1249.8	253	95.7	1598.5	200	1398.5
2008	842.5	277.2	81.9	1201.6	200	1001.6
2009	534.6	259.8	49.8	844.2	150	694.2
2010	505.2	146.5	50	701.7	150	551.7
2011 (est)	430	126	46	602	150	452

Over the past four years the number of multifamily units made up a larger percentage of the total number of housing units than in previous years, which means that an even fewer number of single family homes were built than in the early- and mid-2000s.

I know there was large increase in housing units since 1990, but the drop from the 2006 peak has been precipitous.  Demand from population growth, new family creation, and people who moved home or in with roommates over the past few years and now are able to move back on their own will reduce exisitng supply.  Supply is at 7.5 months, the lowest level since mid-2005.

National employment figures have been improving monthly.  The housing market will not fully recover until employment improves.  Due to the lack of new units and low supply of exisitng homes, a continued improvement in employment will be felt quickly in the housing market.   If you throw in near historic low mortgage rates (3.77% for a thirty-year mortgage), the housing bull story gets even stronger.

Stating the Obvious

The five-year mortgages issued in 2007 are coming due in 2012.  Who'd have thunk it?  Here is a gloomy Bloomberg article discussing the depressing prospects for these mortgages.  There are plenty of good statistics in the article, like late payments on "loans packaged into bonds" being at 9.13%, or $55 billion of loans in bonds mature in 2012, or that there has been $28 billion of new CMBS in 2011, up from $11.5 billion last year.  (At the start of the year, I remember reading that analysts were estimating CMBS issuance of $30 billion to $40 billion in 2011.  Financial uncertainty in the third quarter slowed the CMBS origination market.)

These paragraphs make sense but are not new information:

Loans underwritten during the peak five years ago will be challenged by tighter lending conditions, limited borrower equity in the buildings and the large size of loans relative to current property values, S&P said. Property values have tumbled 42 percent since 2007. 

Lenders are willing to write a mortgage for a maximum of 70 percent of a building’s value, meaning about 63 percent of loans taken out at the height of the property market bubble will be hard to refinance unless the borrower injects additional cash, S&P said.

There is always "extend and pretend," which is not discussed, and is the probable reality for most of these loans. 

Random Fact to Start the Week

Grubb & Ellis Company stock has dropped approximately 63% since early November when Grubb & Ellis Healthcare REIT II announced it was moving its advisor from Grubb & Ellis. 

Battle Brewing

The battle between the remnants of Lehman Brothers and Sam Zell's Equity Residential for Archstone apartments has been simmering for a few weeks but broke open over the past few days.  Both Lehman and Equity Residential are trying to buy lenders' ownership position in Archstone, one of largest multifamily owners in the county.  The deal is complicated because of multiple lenders and that bankrupt Lehman already owns a portion of Archstone, which it purchased in 2007.   If you don't remember:

Archstone was acquired by Lehman in a $22 billion leveraged buyout with Tishman Speyer Properties LP in October 2007 as commercial real estate prices peaked. Lehman, saddled with debt, filed for the biggest bankruptcy in U.S. history in September 2008, as credit markets froze worldwide.

As you can tell by the transaction date, Lehman's acquisition was very late in the real estate / credit  boom, which sealed this deal's fate.

Lehman is trying to buy the portion of Archstone it does not own so it can turnaround and sell it.  Lehman is doing the transaction as part of its bankruptcy and wind-down.  The bids for Archstone represent an $800 million (13%) discount to Archstone's estimated $6 billion value, or at least that's what I could figure out from this Bloomberg article.  (Why does an $800 million discount sound so much bigger than a 13% discount?) 

One More Thing To Keep Me Up At Night

From Calculated Risk, a must-read post on prime brokers re-pledging (rehypothecation) client collateral for their own trading.  A legal, but scary practice.  This high-wire tactic may be behind the missing MF Global money.

Hotel CMBS

Here is a good, long article from Bloomberg on why Commercial Mortgage Backed Securities (CMBS) special servicers try to avoid foreclosures on hotel properties.  Here are a couple of key quotes from the article:

Special servicers, who negotiate with landlords on behalf of investors in commercial mortgage-backed securities, typically install a receiver or hire a broker to sell an office, apartment or industrial building with multiyear leases. Hotel rooms, on the other hand, rent by the night, and contracts with such operators as Marriott International Inc. may be terminated if a property is repossessed, making it harder to run or market.

Hotels are “operating assets where income goes up and down overnight,” said Rick Kirkbride, chairman of the resort, restaurant and recreation practice group at law firm Paul, Hastings, Janofsky & Walker LLP in Los Angeles. “Servicers do drag their feet with them a lot more because they aren’t sure what to do.”

And:

The 53 percent workout rate for hotels compares with 45 percent for apartments, 37 percent for retail properties and 29 percent for industrial, according to Real Capital. The remaining hotels either have been taken over by lenders or their owners continue to negotiate with servicers.

“We work long and hard to not take title to hospitality assets because it’s not an easy solution to operate,” Tom Nealon, vice chairman of LNR Asset Services, the special- servicing unit of LNR Property Corp., said in October at an Urban Land Institute conference in Los Angeles. With “office and other properties that are not as labor-intensive, the marketability is better,” he said.

In addition to the operational aspect, it also helps when a borrower has a large amount of debt outstanding spread over multiple properties.  Examples of loans that were extended and reworked were several hundred million dollars or more.   The article states that in the last two months of 2011 there are $5.5 billion of hotel CMBS loans maturing and in 2012 there are $9.1 billion of CMBS loans maturing.

Behringer Harvard Multifamily REIT I News

Behringer Harvard Multifamily REIT I filed an 8-K on December 1, 2011, announcing that it sold joint venture interests of up to 45% in six of its properties to a Korean firm, Milky Way Partners.  The total price was $178.6 million.   The six properties are 7166 at Belmar; Acacia on Santa Rosa Creek; Argenta; Cyan/PDX; The Gallery at NoHo Commons; and The Lofts at Park Crest.  The REIT is selling 15% to 45% in each property.

In conjunction with and a contingency to the REIT's sale, is that the REIT’s current joint venture partner, a European pension fund, is selling its interest in twelve properties it owns with the REIT through a joint venture to Milky Way Partners, including three that are part of the transaction above.   The 8-K states that upon the completion of the two transactions, Behringer Harvard Multifamily REIT I will own 55% of each of the fifteen properties included in the two transactions.  There is no disclosure on the REIT’s basis in the properties or what value the transaction put on all the properties included in the two transactions.  The 8-K did not specify what Behringer Harvard Multifamily REIT I has planned for the sale proceeds.  

Brass Balls

Love them or hate them, one thing you can't say about the executives at American Realty Capital is that they lack guts and chutzpah.  American Realty Capital Healthcare REIT, which has raised approximately $45 million in investor equity, has made an unsolicited offer for Grubb & Ellis Healthcare REIT II, which has raised approximately $425 million in investor equity.  Grubb & Ellis Healthcare REIT II's board rejected American Realty Capital Healthcare's $9.01 per share offer for all outstanding shares ($6 in cash and $3.01 in American Realty Capital Healthcare shares).  (Where did the $.01 come from?)  I would not be surprised if the American Realty Capital Healthcare's offer becomes a hostile takeover fight.  There are many questions raised by this announcement, deal financing being at the top of the list.  One thing I do know is that this will be fun to watch, kind of like a National Geographic show where a snake eats and digests a much bigger animal.  (The picture below is a python that exploded after trying to eat an alligator twice its size.)

Disaster Stat

I just read on Yahoo! Finance that the RIM's Playbook tablet sold 150,000 units in the third quarter.  This is a tiny fraction of the more than 11 million units of Apple's iPad that were sold over the same period.  Ouch.