Thursday, July 28, 2011

Maddening Distribution Information

Does anyone else hate when non-traded REITs only present daily distribution data?  I just received an 8-K from Hines REIT with this frustrating disclosure:
These distributions will be calculated based on shareholders of record each day during the month of August 2011 in an amount equal to $0.00138082 per share, per day and will be paid in October 2011 in cash or reinvested in stock for those participating in Hines REIT's dividend reinvestment plan. Of the amount described above, $0.00041425 of the per share, per day dividend will be designated by the Company as a special distribution which will be a return of a portion of the shareholders’ invested capital  and, as such, will reduce their remaining investment in the Company. 
Please, if you want to state distributions in fractions of cents, add a summary that tells investors the annualized distribution rate and whether the rate has been dropped, increased or maintained from the previous period.  If the distribution rate changed, state the previous rate.  When I see a daily distribution rate with no perspective, I immediately think the REIT is obscuring bad news.   I'm too busy to check, did Hines REIT increase, decrease or maintain its distribution, at what distribution rate, and how much was the special distribution?

Cole Credit Property II's Per Share Value of $9.35

Cole Credit Property II filed an 8-K yesterday announcing its per share value.  Non-traded REITs are required to provide a per share value eighteen months after the close of their offering.  Cole Credit Property II's value is $9.35 per share.  Below is the method used in determining the non-traded REIT's value:
     In determining an estimated value of the Company’s shares, the board of directors considered information and analysis, including valuation materials that were provided by CBRE Capital Advisors, Inc. (“CBRE Cap”), an independent investment banking firm that specializes in providing real estate financial services, and information provided by the Company’s advisor, Cole REIT Advisors II, LLC.
     In preparing its valuation materials, CBRE Cap, among other things:
    reviewed the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2010, including the audited financial statements contained therein, and the Company’s Quarterly Report filed on Form 10-Q for the quarter ended March 31, 2011, including the unaudited financial statements contained therein;
    reviewed other financial and operating information requested from, or provided by, the Company;
    reviewed and discussed with senior management of the Company the historical and anticipated future financial performance of the Company, including the review of forecasts prepared by the Company;
    compared financial information for the Company with similar information for companies that CBRE Cap deemed to be comparable; and
    performed such other analyses and studies, and considered such other factors, as CBRE Cap considered appropriate.
     The board primarily considered four valuation methodologies that are commonly used in the commercial real estate industry and in valuing real estate investment trusts (REITs), all of which were included in the materials provided by CBRE Cap. The following is a summary of the valuation methodologies considered.
    Net Asset Value — The net asset value methodology determines the value of the Company by valuing the Company’s underlying real estate assets and its entity level assets and liabilities. The value of the underlying real estate was determined by dividing estimated individual property net operating income by estimated market capitalization rates. CBRE Cap’s materials primarily relied on proprietary research, including CBRE market and sector capitalization rate surveys, as well as comparable transaction data and management guidance, in order to determine market capitalization rates to reasonably estimate the Company’s real estate values. CBRE Cap’s materials also relied on market information obtained from the debt and capital markets, management guidance and public filings of the Company to assist in valuing other entity level assets and liabilities.


Discounted Cash Flow Analysis — The discounted cash flow analysis utilizes five-year projected cash flows reasonably likely to be generated by the Company and discounts those future cash flows using a rate that is consistent with the inherent level of risk in the business to determine a present value. CBRE Cap reviewed the Company’s advisor’s projection of future cash flows and applied a perpetuity growth rate to the projected year five cash flows to arrive at a terminal value, and then applied a risk adjusted discount rate to the annual cash flows and terminal value to calculate a present value of such cash flows of the Company.
    Public Company Comparables — The public company comparables methodology utilizes a range of Funds From Operations and Adjusted Funds From Operations, trading multiples of similar publicly-traded companies and applies them to the Company’s comparable metric to estimate the value of the Company. CBRE Cap selected comparable companies based on qualitative factors such as sector focus, asset quality and tenant mix, as well as quantitative factors such as company size and leverage, and adjusted the multiples based on the Company’s relative strength or weakness compared to the comparable company for each of the factors, which resulted in a reduction of the comparable company multiples. In addition, CBRE Cap further reduced the multiples to reflect the lack of liquidity of the Company’s shares as the Company’s shares are not traded on a national securities exchange. Comparable public companies utilized in the analysis were public REITs with portfolios that were primarily retail focused and included similar asset types with similar lease structures to the Company’s real estate portfolio.
    Dividend Discount Model — The dividend discount model calculates the value of the Company by discounting estimated future dividend payments by the Company’s estimated cost of capital. CBRE Cap prepared the dividend discount model by utilizing the expected future distribution payments as provided by the Company’s advisor, and reviewed by CBRE Cap, and calculated the Company’s estimated cost of capital using the risk-free, 10-year treasury rate and adding appropriate risk premiums, which included an estimate of the long-term equity risk premium measured as the performance of the S&P 500 over the applicable risk free rate, and further adjusted for any Company specific risk premium.
     The four approaches to valuation noted above each resulted in a range of values for the Company’s per share value. CBRE Cap weighted each result to determine an overall estimated range of value for the Company’s shares. Upon review of CBRE Cap’s analysis and information provided by the Company’s advisor, the board of directors established a per share price of $9.35, which is within the overall range of value provided by CBRE Cap.
The above is plenty of language without saying much about the inputs that really drive valuation.  Minor changes to these inputs - multiples, discount rates, growth rates, etc. - can provide large differences in values.  Until Cole Credit Property II or any other non-traded REIT that lists a per share value is listed or liquidated, I'll view the per share valuations with skepticism. 

Monday, July 25, 2011

Must Read

I recommend that you read this thread on REITWrecks, which discusses a small offering from American Realty Capital.  The author mixes detailed research, withering commentary, and bruising snark to produce one of the best financial blog posts I have read in some time.  This post needs to win some kind of "excellence in blogging" award.

Wednesday, July 20, 2011

Jump in Commercial Real Estate Prices

Here is a Bloomberg article detailing a 6.3% jump in commercial real estate prices in May over April's prices.  I saw this article this morning but didn't read it until this evening when the large price jump figure hit me.  Here are the first three paragraphs of the article:

U.S. commercial property prices increased in May for the first time in six months as a rebound in distressed real estate helped boost values, according to Moody’s Investors Service.
The Moody’s/REAL Commercial Property Price Index rose 6.3 percent from April, the largest gain since the measure began in 2000. It’s down 11 percent from a year earlier and 46 percent below the peak of October 2007, the company said today.
The index, which measures broad price trends, had fallen to a record low in April as sales of distressed properties undermined real estate values. Distressed deals in May began contributing to rather than delaying a price recovery, according to the Moody’s report.
I know there is plenty of noise in a monthly price figure, but a 6.3% increase is still impressive.

The article also provides price data from Greenstreet and CoStar, both that showed year-over-year price increases.


What a difference a few weeks makes.  The New York Times made a big misstatement in its non-traded REIT slam article from yesterday.  The article stated that American Realty Capital Trust (ARCT) recently valued its shares at $6.62 per share.  Here is the quote:
But nontraded trusts are now required to update their net asset values every 18 months after their initial offering, and their own disclosures to the S.E.C. show their values dropping well below the price at which the shares were originally issued. For example, one REIT, American Realty Capital Trust, recently reported that its shares, which had been sold at $10, were now worth $6.62. The sponsor, American Realty Capital of New York, raised $2.3 billion in the last 18 months, according to its chief executive, Nicholas S. Schorsch. Other sponsors, including Cole, have reported similar declines in share price, public records show.
ARCT closed its primary offering last week at $10 per share, and is not required to make a new valuation for eighteen months.  ARCT did not recently revalue itself at $6.62, and made an 8-K filing this morning stating so and has asked the NYT to correct its error.   ARCT raised its full offering of $1.5 billion, with over $300 million coming in June alone.  I wonder what, if any, impact the article would have had if it was printed in early June?   Did the NYT confuse ARCT with another REIT?

Update:  The New York Times corrected the above article and added this language to the end of the article:

This article has been revised to reflect the following correction:
Correction: July 20, 2011

An earlier version of this article misstated the share price for American Realty Capital Trust.  It was sold at $10 a share, but the current value is not known. It is not $6.62, which is the REIT’s net tangible book value.

Wednesday, July 13, 2011

Insurance Company Lenders

Here is a Bloomberg article from late last week describing how portfolio lending insurance companies are now competing for big commercial loans with Wall Street banks that make loans and then package and sell them as mortgage backed securities.  The article details how Pacific Life and Met Life are expected to beat out big banks for a loan on a 55-story office tower in San Francisco's financial district.  Last week Wells REIT II announced a $325 million loan from Pacific Life for the Market Square office complex in downtown Washington DC that the REIT acquired earlier this year.  In a side note, Wells REIT II has now retired all the short-term acquisition financing (bridge loan and line of credit) it used to acquire the property.

Too Late Baby

The Bancroft family has second thoughts about selling the Wall Street Journal to News Corp. 

Thursday, July 07, 2011

No Pressure - Industrial Income's Line of Credit Requirement

Most non-traded REITs obtain a line of credit to help facilitate acquisitions and other activities.  The lines of credit come with plenty of restrictions and covenants, and are complex financial instruments.  These restrictions and covenants vary per line of credit, and may include limits on a REIT's leverage, require certain minimum debt coverage ratios, and place conditions on a REIT's distributions.  Yesterday, I read (in a filing) a new requirement as part of Dividend Capital's Industrial Income Trust's new $40 million line of credit.  The lenders are requiring Industrial Income, starting for the period ending September 30, 2011, to raise equity of $60 million a quarter (or $20 million a month).  Here is the language from Industrial Income's July 1, 2011, Post Effective Amendment No 5:
The Revolving Credit Agreement requires that as of the end of each month, commencing with September 30, 2011, we must have generated gross proceeds from the Equity Offering equal to an aggregate amount of at least $60.0 million during the previous three full calendar months, which we refer to herein as the “Minimum Equity Raise Requirement.” If we fail to meet the Minimum Equity Raise Requirement, 100% of the net proceeds of our Equity Offering must be applied to reduce amounts outstanding under the Revolving Credit Agreement until we are able to meet the Minimum Equity Raise Requirement. In addition, if we fail to generate at least $30.0 million in gross proceeds during the previous three full calendar months, the Borrower may not draw any amounts under the Revolving Credit Agreement until such condition has been satisfied.
Industrial Income raised over $100 million in the first quarter of 2011, so the requirement does not seem to pose a current concern.  I don't have a problem with this restriction, and mention it because I have not seen this requirement before.  I think it is a smart move by the bankers.  Industrial Income is lucky that the lenders did not require the REIT to do something audacious, like pay even a portion of its distribution from operating cash flows (read page S-2 of the July 1, 2011, Post Effective Amendment No 5).

Wednesday, July 06, 2011

Good News For Apartments

Here is a Calculated Risk article on Reis's apartment report.  Vacancies are down and rent is up.  Vacancies stood 6% nationally at the end of the second quarter and rents at $997 per month.  For the year earlier period, vacancies were at 7.8%, and rents were at $974.  This is a marked improvement.  Here is Calculated Risk's opinion on the impact improving rental market:
A few key points we've been discussing:
• Vacancy rates are falling fast (the excess supply is being absorbed). Note: The excess housing supply includes both apartments and single family homes.

• A record low number of multi-family units will be completed this year (2011). Only 8,700 apartments came on the market in Q1 (in the Reis survey area). This is the second lowest quarter since Reis has been tracking completions - the lowest was 6,000 last quarter.

• The falling vacancy rate is pushing push up effective rents. This also pulls down the price-to-rent ratio for house prices.

• Multi-family starts are increasing, and that will help both GDP and employment growth this year. These new starts will not be completed until 2012 or 2013, so vacancy rates will probably decline all year.
My bold and italics added in the last bullet point.  I hope Calculated Risk's right that an improving apartment market can help GDP and the employment rate.

Friday, July 01, 2011

Dumb Article of the Day

This article that predicts the worst ten housing markets for the next five years has been on Yahoo Finance's top news stories all morning.  What a dumb article.  How the heck do its two authors (or anyone else) have any clue what the worst housing markets will be for the next five years.  I want the three minutes back it took me to read the article and write this post.