Lightstone REIT Implodes; Let's Go to the Audiotape!

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Lightstone REIT Implodes; Let's Go to the Audiotape!

Postby REIT Wrecks » Thu Jun 24, 2010 2:54 pm

Who is Steve Hamrick and how much must David Lichtenstein be paying him? These were two of the questions tumbling around in my mind as my unbelieving ears waded through the noxious verbal swamp of the Lightstone REIT 2010 Q1 earnings conference call (Update: Lightstone REIT Cuts Dividend; SEC Involved but Role Unclear).

If you're an investor in either of the two Lightstone REITs, you'll be forgiven for not knowing there even was a Q1 earnings call. Naturally, this is because Lightstone doesn't make these earnings calls available to its investors, nor does it record or otherwise make these calls available for later review by anyone. But don't worry! REIT Wrecks has a recording of the entire call safely archived in our truth vault, and we have posted parts of it here for your listening pleasure.

For the sake of brevity and clarity, we edited the forty-one-minute-and-fifty-eight-second pep talk (the call was held for the various obsequious, head-bobbing financial planners and brokers who sell the REITs) into two minutes and ten seconds of high-fidelity, investor-oriented substance.

The insanity in this call was simply suffocating. By using various folksy verbal red herrings and truckloads of empty chatter to cloak reality, Steve Hamrick, who is president of the Lightstone REITs, deftly attempted to sidestep any real scrutiny of the REITs' actual financial performance. In response, we gleefully deleted this obfuscatory noise (as well as, unfortunately, some outright falsehoods), and we hereby present the substance of the call for your listening pleasure (If you can't see the play button on the bottom left, you may be missing the plug in...just click on the "Lightstone Rips it Up!" link to hear the audio):

Lightstone Rips it Up!.mp3 [ 1.99 MiB | Viewed 14381 times ]


Yes, you heard it right: Hamrick actually said that paying dividends in excess of earnings is "appropriate and frankly necessary to attract investors" even though "it does reduce principal and does come at the expense of investors" Simply put, Lightstone's dividend is nothing more than a fictitious sales tactic, and even Hamrick is doubtful that Lightstone could sell the shares without it.

Unfortunately, investors in Lightstone's first REIT (Lightstone Value Plus REIT I) are now paying the price for Lightstone's dividend fiction. As Hamrick explains in the call, Lightstone is selling shareholders' interests in the Prime Outlets portfolio, but Lightstone won't distribute the proceeds. This is because without Prime Outlets, the cash flow from Lightstone's nearly $306 million in remaining assets does not cover the 7 percent dividend. ($306 million includes the 2009 write-downs, the REIT's unconsolidated $66 million joint venture interest in 1407 Broadway and its $11 million investment in Park Avenue Funding). Of course, this begs the question: why did Lightstone sell the REIT's only decent asset in the first place? That's a subject for an entirely different post, but as Hamrick himself clearly states, if the Prime Outlet sale proceeds were distributed, the remaining assets:

would not be able to continue paying the 7 percent dividend, if they would be able to pay any dividend at all.


As if this bombshell weren't enough, even more amazing is the fact that some astonishingly deluded financial advisor comes on at the very end and congratulates Lightstone for creating this disaster. He calls it a "big win". Clearly he's either in denial, or actively choosing to ignore the fact that throughout its entire existence, this REIT paid a 7 percent dividend that was almost entirely made up, and his clients' equity capital was severely eroded as a consequence.

In fact, In 2007 and 2008, Lightstone reported that 53% and 54% of the dividend, respectively, had been paid using proceeds from its public offering - not cash flow. In 2009, the Company reported only $1.4 million in operating cash flow, yet somehow managed to pay $12.3 million in dividends. In Hamrick's own words, this practice does nothing but erode equity and it comes at the expense of their own investors. How could this possibly be "appropriate and necessary?" In this particular case, the result is a seasoned, more than four-year old REIT with $306 million in "assets" that still can't pay a real dividend.

Surely, Lightstone Value Plus REIT I was a "big win" for financial advisors, who collectively earned $24 million in commissions for selling it to their clients, and it was definitely a "big win" for the Lightstone Group, the REIT's sponsor, which pocketed almost $30 million in fees and expense reimbursements in 2009 alone (over and above property management fees). For investors however, who weren't even invited to join a 40 minute phone call, it's clearly a different story.

Related Posts:

Watch out! Lightstone REIT is Trailing Smoke

REISA Addresses Non-Traded REIT Ponzi Scheme Allegations

Sale and Promotion of Non-Traded REITs - FINRA Investigates

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Re: Lightstone REIT Implodes; Let's Go to the Audiotape!

Postby crabsofsteel » Fri Jun 25, 2010 9:50 am

If you would rather not listen to this drivel, you can read their 10-Q at

http://www.sec.gov/Archives/edgar/data/ ... 85_10q.htm

"As of March 31, 2010, our total borrowings represented 134.9% of net assets. " And they're paying out dividends?

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Re: Lightstone REIT Implodes; Let's Go to the Audiotape!

Postby ddo2 » Fri Jun 25, 2010 3:11 pm

Here's a question: How is this legal? To obtain REIT tax treatment you have to pay out 90 percent of revenue. So, how is paying out 130 percent of revenue (or whatever) consistent with that requirement? I guess because it creates taxable income the IRS has no reason to complain.

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Re: Lightstone REIT Implodes; Let's Go to the Audiotape!

Postby crabsofsteel » Fri Jun 25, 2010 5:10 pm

130% is more than 90% so it's legal. The fundamental rule of securities law is "caveat emptor" meaning "buyer beware". So if I tell you that the Brooklyn Bridge is publicly owned and you proceed to buy it from me, you're the chump. Here, Lightstone is telling you "we can not redeem your shares at current valuations for our properties". It's the same thing.

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Re: Lightstone REIT Implodes; Let's Go to the Audiotape!

Postby jam3 » Tue Jul 06, 2010 2:14 pm

I have a question....how is it legal to audiotape a conference call that is not public?? And then to go as far as editing it to only allow your forum viewers to hear what you want them to hear? I guess it's because you run a company that is in direct competition with REITs, so your best sales tactic is to trash your competition. Whether you think Non-traded REITs are good or bad, you people have to see thru this guys agenda, don't you? I respect that he has much knowledge about real estate but to create a website just to bash an industry because it gets much more capital flow than yours is juvenile at the least. It makes me laugh.

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Re: Lightstone REIT Implodes; Let's Go to the Audiotape!

Postby REIT Wrecks » Wed Jul 07, 2010 11:57 pm

jam3 wrote:blah, blah, blah.


Lightstone's call could not have withstood the scrutiny of professional analysts. Here is an excerpt from the latest 10Q regarding the dividend and the decision to withhold the Prime Outlets' sales proceeds from investors:

"In reaching its determination, the board considered that, in the event all proceeds were distributed, we would need to substantially reduce or eliminate our dividend to shareholders."

And here is a breakdown (page 35 of the 10Q) which shows how Lightstone has managed to keep paying the 7% dividend. It has very little to do with collecting rents and managing expenses - or making sensible acquisitions. On the contrary, the focus is always on paying brokers to sell ever more shares:


Lightstones Very Public Ponzi Scheme.jpg
"Madoff paid certain investors out of principal from other, different investors, a hallmark of a Ponzi Scheme" Excerpt from December 2008 SEC Complaint against Bernard L Madoff
Lightstones Very Public Ponzi Scheme.jpg (62.09 KiB) Viewed 13828 times


Hamrick's comments on that call were very carefully orchestrated, and the excerpts posted here fully reflect not only what he said, but also what Lightstone reported in its latest 10Q.

So I have a different question: Lightstone Value Plus REIT I is a publicly registered REIT with 7,734 shareholders as of year end. Why were they not told about the earnings call, and why do they have to come here, to this website, to listen to it?

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Re: Lightstone REIT Implodes; Let's Go to the Audiotape!

Postby crabsofsteel » Thu Jul 08, 2010 1:06 am

jam3

from a compliance perspective any public disclosures are exactly that ... public. If it can be found on the SEC website ... it is public and can be quoted excerpted or whatever you like except transformed and RW has not done that. REIT filings are on the SEC website: You make it sound like RW is conflicted but if anything I have to say you will not find similar analysis exposing REIT scams anywhere else on the public airwaves. Unless you can tell us that REITs are paying their dividends out of earnings instead of equity what is your point?

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Re: Lightstone REIT Implodes; Let's Go to the Audiotape!

Postby jam3 » Thu Jul 08, 2010 10:50 am

I'm not saying that at all. My point is, non-traded REIT's are not much different than bonds if you are only comparing how distributions are paid.... A bond issued to build a toll-bridge is issued to raise money, correct? They pay a "coupon" on that bond-issue, correct? Where is the money coming from to pay that coupon? It's certainly not coming from revenue on a toll-bridge that hasn't been built yet!
Now, I will further say that a non-trade REIT is NOT an alternative to fixed-income / bonds but everyone keeps screaming that they are Ponzi schemes. I think it's childish to build a website to bash an investment just because it's in direct competition with something you are trying to sell. Yes, I think REITs are over utilized and sold to unsuitable clients but just like LP's, bonds, equities, mutual funds, annuities, etc. they have a place and can be profitable to the investors as well as the B/Ds and the sponsors. Take a look at past CNL and Inland REITs that have gone full-cycle. I know of one in particular that returned a substanial amount of money (IRR) and made investors happy. In fact, most investors put their money back into another REIT by the same sponsor. Just because REITs are out of favor right now and there are so many instances of bad sponsors, bad debt and bad portfolios, you can' paint them with a broad brush just because you don't like them (for the wrong reasons).

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Re: Lightstone REIT Implodes; Let's Go to the Audiotape!

Postby REIT Wrecks » Fri Jul 09, 2010 10:19 am

"The obscure we see eventually. The completely obvious, it seems, takes longer."
Edward R. Murrow, the journalist who defended freedom of thought during the McCarthy era

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Re: Lightstone REIT Implodes; Let's Go to the Audiotape!

Postby crabshack » Fri Jul 16, 2010 2:16 pm

My point is, non-traded REIT's are not much different than bonds if you are only comparing how distributions are paid.... A bond issued to build a toll-bridge is issued to raise money, correct? They pay a "coupon" on that bond-issue, correct? Where is the money coming from to pay that coupon? It's certainly not coming from revenue on a toll-bridge that hasn't been built yet!


This analogy doesn't hold at all. A REIT is an equity investment; the principal is at risk. When non-traded REITs pay dividends out of their capital, they are simply devaluing the equity that you've paid for -- giving some of it back to you and pretending that you're getting a dividend. You can't see that the devaluation has happened because there's no market for the shares you own, but the devaluation is very real. Years later, when/if the non-traded REIT has a liquidity event, your shares will be worth that much less.

When you buy a bond, on the other hand, you're guaranteed to get your principal back. Plus, you can generally sell bonds at any time. And in the case where the bond issuer is actually unable to service its debt and goes bankrupt, bondholders are typically senior to equity holders in repayment. Basically, the risk profiles of bonds and non-traded REITs don't match up at all.

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