TNP Strategic Retail Trust Using Dividend as Sales Tactic

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TNP Strategic Retail Trust Using Dividend as Sales Tactic

Post by REIT Wrecks » Sun Jan 02, 2011 2:48 pm

On many occasions, these posts write themselves, and this is one of those occasions. TNP Strategic Retail Trust was organized by Tony Thompson, formerly of Grubb & Ellis (the result of a reverse merger in which Thompson's NNN Properties acquired Grubb). Life at Grubb -- not to mention the stock price -- soured soon after the merger, and Thompson left to form eponymous Thompson National Properties.

Through TNP, Thompson is sponsoring a number of real estate investments and joint ventures, and the public offering for one of them, TNP Strategic Retail Trust, was declared effective by the SEC on August 7, 2009. However, TNP didn't manage to break its $2 million escrow until three months later, and Thompson's fundraising efforts have continued to be lackluster compared with many other non-traded REITS --- only $21 million was raised through the end of Q3 2010.

Thompson used the cash to acquire two retail properties (two more properties have since been acquired), the 170,000 square foot Waianae Mall, on the North Shore of Oahu, and the 94,574 square foot Moreno Valley Marketplace in Rancho Belago, California. The Moreno Valley Marketplace was 74% occupied at the time of the acquisition, while the Waianae Mall was 98% occupied but only 84% leased. TNP assumed a $21.7 million first mortgage on Waianae, which equates to 80.5% loan to value, and the mortgage must be refinanced in 2015. If this all sounds a wee bit risky for an income oriented investment being sold to widows and orphans, it is (and perhaps it's why Thompson himself had to personally guarantee the assumed debt). It may also account for TNP Strategic Retail Trust's net loss through the first 9 months of 2010, as well as its negative operating cash flow during the same period.

Given the losses and negative operating cash flow, how is Thompson able to pay any dividend at all, never mind a dividend of 7 percent? It's pretty simple really:
The distributions paid during the nine months ended September 30, 2010 exceeded the Company’s net income as the Company had a net loss for the period. Additionally, as the Company had negative cash flow from operations for the period, cash amounts distributed to stockholders were funded from proceeds from the offering and represents a 100% return of capital to stockholders.

Source: [url=http://www.sec.gov/Archives/edgar/data/1446371/000095012310105817/g25224e10vq.htm]TNP Strategic Retail Trust 2010 Third Quarter 10Q[/url]
Clearly, Thompson and his board of directors are effectively robbing Peter in the hope that they can pay Paul down the road. Unfortunately, this can be incredibly damaging if you're an investor, and [url=http://www.reitwrecks.com/forum/viewtopic.php?f=2&t=31]this is what can happen when non-traded REITs pay dividends using offering proceeds[/url]. The cynical exercise of paying dividends to existing investors using money raised from new investors is nothing more than a marketing gimmick fuzzy dice with a logo, [url=http://www.reitwrecks.com/forum/viewtopic.php?f=2&t=5]if not an outright ponzi scheme[/url], and it should be illegal. In the Lightstone REIT 2010 Q1 earnings call, Steve Hamrick, formerly President of the Lightstone REITS,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" [url=http://www.reitwrecks.com/forum/viewtopic.php?f=2&t=43](click here to listen to Hamrick's own words)[/url]

So, as of the end of Q3, TNP Strategic Retail Trust had only raised $21 million, the company's 7% dividend exceeded net income (in fact, there was no net income; the company had a loss...), and 100% of the cash distributed to existing shareholders was funded via cash raised from new shareholders. Unless you're Bernie Madoff, is this any way to run a REIT?

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