Thursday, December 13, 2012

What's The Opposite of Accretive?

De-cretive? Di-lutive?  Di-sappointing?  None a pretty word.  I posted Tuesday about Cole Credit Property Trust II's suspension of its distribution reinvestment plan and its share repurchase plan.  I speculated that the suspension of the two plans could be the initial steps toward CCPT II's liquidation.  Another idea floated through my brain after re-reading CCPT II's lawyerly disclaimer sentence in CCPT II's investor letter (emphasis added):
While no final decisions have been made, CCPT II anticipates being in a position to announce further updates regarding a potential liquidity event in the near future
What if all the entities supposedly looking at CCPT II were proposing values below its current distribution reinvestment price of $9.35 per share, and share repurchase price of $9.31 per share? If this is the case, the board's decision to suspend the distribution reinvestment program and share repurchase program makes sense and doesn't necessarily signal an imminent liquidity event.

Buying shares back at prices higher than the shares' value is bad business, the board cannot knowingly overpay for assets.  On the other hand, if the estimates of share value were higher than the share repurchase and reinvestment price, it'd be in CCPT II's shareholders' best interest to buy as many shares as possible at the undervalued price.  CCPT II's redemption requests have exceeded actual redemptions:
During the nine months ended September 30, 2012, we received valid redemption requests pursuant to the share redemption program, as amended, relating to approximately 15.2 million shares, including those requests unfulfilled and resubmitted from a previous period, and requests relating to approximately 4.6 million shares were redeemed for $43.2 million at an average price of $9.31 per share. The remaining redemption requests relating to approximately 10.6 million shares went unfulfilled, including those requests unfulfilled and resubmitted from a previous period. Requests for redemptions that are not fulfilled in a period may be resubmitted by stockholders in a subsequent period.
I reviewed redemption requests for both Dividend Capital's Diversified Property Fund (DPF) and CNL Lifestyle, both of which raised equity capital in the mid-2000s.  Like CCPT II, both redeem far fewer shares than requested.   But both REITs increased redemptions after recent revaluations revealed a lower net asset value per share than the previous redemption price.  DPF redeemed 1% of its shares in the second quarter, but redeemed 25% of requests in the third quarter after it lowered the value of its shares.   Lifestyle, after its August revaluation, increased the amount of shares it was willing to redeem per quarter.  The implication to me is that both DPF's and Lifestyle's boards were hesitant to repurchase too many over shares at prices greater than what the boards believed the respective REIT's actual net asset value.  There are many reasons for a non-traded REIT to limit redemptions and buying shares back at prices higher than a REIT's asset value is but one. 

I guess we'll know shortly whether CCPT II's board's decision to suspend CCPT II's distribution reinvestment and share repurchase plans were a precursor to a sale or an act of fiscal prudence.

7 comments:

Anonymous said...

It's the precursor to a sale. Looking at this it seems obvious a REIT will be the buyer in some sort of share exchange and the number of shares involved needs to remain fixed. The interesting question becomes, at what price? The brain surgeons at Cole marked up the share price inexplicably in 2011 to a ridiculous number, $9.35. My guess is a deal gets done substantially south of that number and the spin and apology tour will begin. Probably doesn't help that LPL has alot of client money in CCPT2 and they are being sued in MA for unscrupulous sales practices. This could get interesting! You gotta love the nontraded REIT world - never a dull moment with these clowns!

Rational Realist said...

I believe it's a precursor to a sale, too, although timing is anyone's guess.

Anonymous said...


Apparently Cole received a lot of bids on the portfolio but they were all rejected. What that means going forward I have no clue.

Anonymous said...

"were a precursor to a sale or an act of fiscal prudence" - probably a combination of both.

Anonymous said...

Any more info on what's going on with CCPT2? I'm a small investor (about 25K initial investment now "worth" about 31K) and I'm really worried about whats going to happen here....

Rational Realist said...

No update on CCPT II. I wouldn't be worried. CCPT II is paying a solid dividend and a liquidity event, if there is one, doesn't have to impact the assets of the REIT. Any liquidity price is unknown, but a liquidity event doesn't necessarily mean you have to sell your shares. It's possible CCPT II can provide a liquidity option, along with an option for investors to keep shares and maintain dividend.

Anonymous said...

Great, thanks for the information. I've been reinvesting the dividends from the beginning and have read that the people getting checks every month have been bleeding the REIT of it's real worth....

Guess I fall under one of those "under-informed" people that is the reason they are getting sued in MA...which by co-incidence is where I live....