Wells REIT II Signals 40% Drop in Share Price

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Wells REIT II Signals 40% Drop in Share Price

Post by REIT Wrecks » Sun Jan 02, 2011 1:23 am

Unfortunately, FINRA Notice 09-09 is finally starting to chip away at the the ridiculously uniform $10 valuations peddled by non-traded REIT sponsors and brokers, and many investors are now digesting big losses on the value of their non-traded REITs as a consequence. Sadly, FINRA deserves only part of the cedit -- the rest belongs to non-traded REIT sponsors themselves, many of whom cooked up such foul smelling investment programs that there was almost no chance for investors to make money. Wells REIT II appears to be neck and neck with Behringer Harvard in this sordid race to the bottom, and it offers a good example of why investors should avoid this space.

Wells REIT II raised gross offering proceeds of approximately $5.8 billion, but only managed to invest $4.7 billion of that. The $1.1 billion difference between capital raised and capital deployed represents an almost immediate 20% hit to investor principal, and this loss can be very, very difficult to make up, even in a good market. Sales commissions paid to brokers and financial planners comprised almost half the difference ($515 million in commissions! :shock: ), Wells REIT's egregious 2% acquisition fee accounted for another $115 million, and Wells used $76.2 million in offering proceeds to pay "organizational" expenses, plus $386.7 million more to redeem shares for investors who managed to get out before the world changed. Combine this immediate 20% loss with a financial crisis and falling rents for office space, and you've got the potential for real trouble.

In its third quarter 10Q, Wells REIT II reported that net income through the first 9 months of 2010 dropped to $383,000, from $14.1 million in the prior period, and Wells said they were experiencing "a negative trend in our ability to fully cover stockholder distributions with operational cash flow." Wells also said that "economic downturns in our core markets...adversely impact the ability of our tenants to make lease payments and our ability to re-lease space on favorable terms when leases expire, either of which circumstance could further adversely affect our ability to fund future distributions to stockholders."

Cash is clearly king, and now that Wells no longer needs that redemption program to seduce new investors (the offering closed on June 30, 2010), the Company quietly amended its share redemption plan in September (the amendment is attached below). After the September amendment, investors with "Ordinary Redemption" requests will only get 60% of the price they paid for the shares. Does a 40% loss sound like the stable, safe, reliable "bond-like" investment that your broker sold you, or was buying this REIT even more risky that owning stocks?

Even more telling, the amendment says that Wells REIT II will pay investors 95% of the price established on the Net Asset Value Publication Date, which is 18 months after the termination date of the offering (December 31, 2011). This is the valuation requirement established by FINRA 09-09, and with this amendment Wells appears to be signaling that the FINRA valuation could be 40% below the $10/share originally paid by investors. A 40% decline in share value would not be unprecedented, and [url=http://www.reitwrecks.com/forum/viewtopic.php?f=13&t=31]Behringer Harvard recently disclosed an estimated 57% loss of principal when it revalued the shares of Behringer Harvard REIT I[/url].

But don't cry for Leo Wells folks. Almost no matter what, he gets an asset management fee of $32.5 million annually, reimbursement of all costs and expenses (including salaries), a disposition fee of 1% of the sales value of the assets, and an "internalization fee" of more than $100 million -- all after collecting that ridiculously high 2% acquisition fee on the way in, and regardless of how the investors actually fare. Non-traded REITs are in the business of amassing assets, not making money for investors, so after having raised another $5.8 billion, it's no wonder Wells can afford to go on safari in Africa whenever he wants.

[url=http://skimble.blogspot.com/2004/11/how-to-steal-50000-from-widow.html]But what about that widow and her $50,000 that's no longer worth a penny?[/url] Or Wells REIT I investors, who, according to an analysis published by the Wall Street Journal, [url=http://online.wsj.com/article/SB10001424052748704194504575031570991760014.html]saw a paltry 2.1 percent return on their money over seven years?[/url] Unfortunately, nobody in this market is paid to worry much about investor returns -- and one Southern California "financial advisor" that I met pretty much summed it all up: "who cares if [non-traded REIT investors] just break even??"
Attachments
Amended & Restated Share Redemption Program.doc
"The price that the Company will pay [is] 60.0% of the price at which the Share was originally issued by the Company"
(47 KiB) Downloaded 709 times

skimble
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Re: Wells REIT II Signals 40% Drop in Share Price

Post by skimble » Wed Jan 05, 2011 9:16 pm

To a certain extent I agree with that Southern California "financial advisor" — if people [i.e., non-traded REIT investors] are going to be that stupid, who are we to tell them otherwise? Why should we care? Still, I can't help myself but want to protect the innocent from the vultures who "manage assets" from behind a cloak of Christian sanctimony.

Recently I discovered Leo Wells's YouTube channel...

Leo Wells on ethics...
http://www.youtube.com/watch?v=vN5miAs6ASw
Adding comments has been disabled for this video.

Leo Wells, President, Wells Real Estate Funds, Elected to NAREIT(R) Board...
http://www.youtube.com/watch?v=2nUL1uWPBJY
Adding comments has been disabled for this video.

Leo Wells on Customer Service...
http://www.youtube.com/watch?v=4bGUeO4bh20
Adding comments has been disabled for this video.

...and his six other videos...
http://www.youtube.com/user/LeoWellsIII#g/u

I have to admit I could only watch these self-adulating videos with the sound turned off. It seemed entirely appropriate, since "Adding comments has been disabled for this video" — just like adding comments by his investors has been disabled for his REITs.

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Re: Wells REIT II Signals 40% Drop in Share Price

Post by REIT Wrecks » Mon Sep 26, 2011 6:08 pm

Wells REIT sent a letter to investors on Friday helpfully informing them that the upcoming revaluation of their Wells REIT shares will not affect their dividends:
Wells REIT wrote:Wells REIT II is currently working with an independent valuation firm to complete an initial appraisal of the portfolio‘s net assets (meaning the properties and the debt associated with them). This firm will then use its appraisal as the basis for calculating a new estimated value per share for Wells REIT II. This net-asset-value, or NAV, per share will be published this November...This valuation will have no effect on the dollar amount of your quarterly distributions. Your distributions will continue to be calculated as they always have been, on a cents-per-share basis, regardless of share value.
That's just dandy! Unfortunately, it's smoke and mirrors. The revaluation will reduce investor principal, so much so that it could fully offset the dividends paid to date, and investor returns could potentially go negative. Wells REIT II described the issue thusly in their 2009 10K:
Wells REIT II wrote:we may fund our distributions from borrowings or even the net proceeds from our ongoing public offering. If we fund distributions from financings or the net proceeds from our public offering, we will have less funds available for the acquisition of properties, and the overall return to our investors may be reduced.

Source: [url=http://www.sec.gov/Archives/edgar/data/1252849/000119312510067128/d10k.htm]Wells REIT II 2009 SEC Form 10-K[/url]
Unfortunately, Wells left this little reality check out of its shareholder letter. The share revaluation will be published in November.

proczach
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Re: Wells REIT II Signals 40% Drop in Share Price

Post by proczach » Tue Nov 15, 2011 7:29 pm

I'm lucky, I'm only in for $20,000. Because I had been in and out of jobs, I had put all my various 401K's in CD's. After the crash when things were going back up, I took a small hit cashed them out of First Community Credit Union in Houston, where my wife and I had our regular banking and where I had done small household loans, figured they were good people. I had around $124,000 in CD's, I was going to put it in TRowePrice stuff, where we had other funds. They steered me to some quasi-independent guy with CUNA Brokerage Svcs in their office. I admit he sweet talked me to put 100,000+ into various Franklin Templeton and 20,000 into Wells. He took some fees, of course. After a year of grief I moved the Franklin Templeton into TRowePrice, made good choices and have done quite well. I cut my losses a little bit and told Wells to send me the dividend checks so at least I could put that right into TRowe. I had been debating for over a year about taking the hit and getting out all the way, I'm thinking, screw it, I will, now I wonder how long til they send the check once I do? Worst case scenario is that writing off the Wells, with what I've made in TRowe it's still a little more than if I had left it in CD's

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