Friday, March 30, 2012

Inland Western, er... Retail Properties of America

The real estate investment trust formerly known as Inland Western REIT,  recently renamed Retail Properties of America (RPA), has filed several recent amendments to its S-11.  The March 23, 2012, amendment had some points worth noting.  RPA's filing listed an expected public offering share price of $10 to $12.  This price is based on RPA's 2.5 to 1 reverse stock split.  To an original investor, the estimated $10 to $12 listing share price is the equivalent of a $4.00 to $4.80 stock priceStated another way, the estimated RPA list price is 52% to 60% lower than an investor's original share price.  There is no assurance the estimated listing price will be realized or that the stock, once listed, will stay above the estimated price.

RPA is seeking to raise $320 million in new equity along with the listing, assuming a mid-point listing price of $11 per share.  The underwriters presented on the front page of the S-11 for the listing and stock offering are J.P. Morgan, Citigroup, Deutsche Bank Securities, KeyBanc Capital Markets, Scotiabank, Wells Fargo Securities and PNC Capital Markets.  Page 44 of the S-11, and this is my favorite part of the S-11, states how RPA plans to utilize the offering proceeds:
Affiliates of J.P. Morgan Securities LLC, Citigroup Global Markets Inc., Deutsche Bank Securities Inc., KeyBanc Capital Markets Inc., Wells Fargo Securities, LLC, PNC Capital Markets LLC and Scotia Capital (USA) Inc. are lenders under our senior unsecured revolving line of credit, and will receive their pro rata portion of the $170 million of the net proceeds from this offering used to repay amounts outstanding under our senior unsecured revolving line of credit. Accordingly, more than 5% of the net proceeds of this offering are intended to be used to repay amounts owed to affiliates of these underwriters.
One motivation for the stock offering is clear; over half the offering proceeds ($170 million of $320 million, or 53%) is going to repay the underwriters or their affiliates.  The underwriters are selling RPA equity to get repaid money they've loaned RPA.  The underwriters or their affiliates get repaid immediately, while the original equity investors have an 18-month deferred liquidity period that starts at an estimated 52% to 60% discount to their original investment in RPA.  There is nothing wrong, unethical or untoward with what the underwriters are doing, but it seems like a tough sale to me.

I wrote a post last week sharing my opinion on internalization fees.  RPA is one reason I believe the internalization fee has a limited future.  RPA's S-11, to its credit, neatly lays out many shares RPA received (its internalization fee) for its advisor in 2007:
2007 Internalization
On November 15, 2007, pursuant to an agreement and plan of merger approved by our shareholders on November 13, 2007, we acquired, through a series of mergers, four entities affiliated with our former sponsor, IREIC, which entities provided business management/advisory and property management services to us. Shareholders of the acquired entities received an aggregate of 37,500,000 shares of our common stock valued under the merger agreement at $10.00 per share. In December 2010, certain of the shareholders returned 9,000,000 shares of our common stock to us in connection with our settlement of a lawsuit relating to this
acquisition. As a result of the mergers, we now perform substantially all of our key operational activities internally. In connection with the mergers, we and our former business manager/advisor and our former property managers entered into a number agreements and amendments to agreements with The Inland Group, Inc. and certain of its affiliates. See “Certain Relationships and Related Transactions.”
RPA's former advisor, or its shareholders, owns 28,500,000 shares of RPA stock, not adjusted for the reverse stock split.   Based on the estimated share price of $4.00 to $4.80, this gives the internalization fee a current value of $114,000,000 to $138,800,000.  (Adjusting for the reverse split gives the same result - 28,500,000 shares divided by 2.5 equals 11,400,000 shares, which multiplied by $10.00 is $114,000,000, and multiplied by $12.00 is $136,800,000.)

A four-and-half-year period between internalization and listing is a long time, especially given what has happened to commercial real estate and the capital markets since late 2007.  Internalization fees may not be gone, but I don't think we'll see a situation anytime soon where investors lose over half their investment and management walks away with a $100 million payday.

6 comments:

Anonymous said...

I am a financial advisor with clients who invested in Retail Properties of America (formerly known as Inland Western Retail Real Esate Investment Trust). In the past I felt that non-traded REITS had benefits that would accrue to investors. With the sleight-of-hand (10 to 1 stock split & a stock dividend) that has occurred with the listing of RPA on the NYSE this week, and your discussion concerning internalization fees, I will no longer recommend non-traded REITS to my clients in the future. I visited the Inland home office to conduct my own due diligence many years ago and came away believing it was a good company with highly competent and ethical executives. My mistake.

Anonymous said...

I am an investor in this REIT and am a loss for words as to how I feel about all of this. A few that come to mind are frustrated, betrayed, and cheated. At this point, I don't know if I will ever recoup my initial investment. And, sadly, there isn't anything I can do about it, except hope to get the most back that I can. Which really hurts me, because I am in a financial situation where I really need this money. I will never invest with them again.

Anonymous said...

When my financial advisor recommended that I purchase this REIT I asked him if this was a safe investment and he told me it was one of the safest investments you can make. I feel I was misguided and I have currently lost approximately $228,000 if I sold all of the stock today. I fired my financial advisor a little to late.

Anonymous said...

I am an investor in this REIT and am VERY ANGRY at how this company has mishandled my hard earned money. It was a "sure bet" according to my EX Financial Advisor. $20,000 down the drain - the real kicker is that I am now unemployed and NEED the money. I am so mad - the thread here is Ameriprise Financial Advisors. What did they have to gain by recommending this investment to their clients??? I am going to unload this investment as soon as possible. For those of you in the same boat - CMG Partners is proposing a good deal to purchase these stocks back. Thank you.
Anonymous

Anonymous said...

My Ameriprise Financial advisor recommended this "safe investment" back in 2005. My $80k investment prior to the stock going public was $74k and overnight it plunged to approximately $37k and that is calculating the B - shares that cannot be sold now. I am in discussions with a law firm that says we can recover our losses through FINRA litigation. I am going to pursue this. What do I have to lose?

Anonymous said...

Like most of those who posted here, I'm an investor who lost a ton of money on something my Ameriprise adviser said was safe. I think a lot of us investors are suffering alone, each of us trying to "invent the wheel" to figure out what we can do about this. I think we should start to share some information. Feel free to write me at adirondackclipper@gmail.com. I've never created a website, but with someone out there I think we ought to create one that can be a place to share and get information.