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.