On June 28, 2011, Cole Real Estate Investments announced that it is actively exploring options to successfully exit CCPT II’s portfolio within the next 12 months, and that the potential exit strategies it is looking at include, but are not limited to, a sale of the portfolio or a listing of the portfolio on a public stock exchange.This simple statement clearly presents the REIT's intention to list on an exchange or sell the portfolio within a year. Of course, the liquidation process may take more than a year, but telling reps and investors a specific date is a target Cole will have to stand by and defend.
Wednesday, June 29, 2011
Cole REIT Announces Exit Strategy
In a short 8-K filing yesterday, Cole Credit Property Trust II announced that is exploring liquidity options, which it expects to complete within the next twelve months. Here is the language:
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There is an interesting post on REITWRECKS from yesterday about Cole Corporate Income Trust. It appears that they filed a 424B3 on Friday afternoon (convenient timing). This looks to me to be a disclosure of an affiliated transaction between this fund and a Cole note program to acquire an over-levered office property with a short remaining lease term and no rent increases. Cole has acquired the property with only enough equity to pay their own fees ($637,000 plus $300,000+ in annual asset management fees) and placed a mortgage, a mezz loan and a third loan on the property to cover the rest. They also disclose that the acquisition price of almost $33M is $6M more than the tax basis of the property.
How can the due diligence community tolerate such blatant disregard for investors by this company? How can the biggest (and supposedly best) broker dealers (LPL, ING, Commonwealth, Lincoln Financial, etc.) continue to approve products from a management team that would ever conceive of entering into such an over-the-top, over leveraged, under-the-table transaction? How can you buy from yourself at a profit, pay enormous fees, assume near term maturity debt, lever the property to 97% and burden a new fund with a legacy asset in every sense of the term all in one ill-conceived transaction? There should be some sort of award for that particular accomplishment. I’ve always thought Cole was a good company that was able to find and acquire good assets. Why would they need to buy a bad asset from themselves at bad prices and on bad terms?
I thought that the non-traded REIT community was moving past deals such as these and adopting generally investor friendly policies going forward. I guess I was wrong. Cole Capital was mentioned in the Wall Street Journal last week in an article about the troubles facing firms such as David Lerner’s. The article noted that Cole was coming out with a fund with lower fees and better liquidity than their historic deals. But all the liquidity and lowering of fees won’t help investors when the deals the funds invest in are inherently bad. And bad deals between affiliated entities are unforgivable.
Can you please review this transaction and provide commentary? Voices like yours need to be heard in this space to prevent transactions like this from happening.
Thanks for the comment. I will take a closer look, but after reading the filing it looks like the affiliate facilitated just the purchase, and the property was not legacy inventory. Leverage is high, but a good portion is short term debt that will be paid back with investor equity, and total leverage will be 55%. Property is 100% leased and tenant is Medtronic, AA- S&P credit rating.
The key is CCIT's equity raise, which has been slow. This bears watching because the carrying cost of the debt is higher the longer its outstanding.
I don't see this deal being too far out of the norm for a REIT in its early stages, especially given Cole's history of being able to raise substantial equity.
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