American realty capital trust, Inc.

American realty capital trust, Inc.

Postby mcaldwell » Wed Mar 23, 2011 11:59 am

Need some help if possible. Does anyone have any information that may be useful about the above Reit? I own a small position ($7k) and have been hearing something regarding a recent loan that was made inside the fund to another affiliate of the company. As I understand it (and I may not have understood correctly), the loan was used for another fund to buy properties in Manhattan.

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Re: American realty capital trust, Inc.

Postby Foz85 » Fri Mar 25, 2011 3:12 pm

The information you received concerning ARCT REIT is incorrect. May have misread or miss-interpreted the filing. It is not a loan and there’s no debt. It is a joint venture agreement between two REITs who bought a property together for a net-lease investment in Manhattan. The deal looks accretive to both companies and fits their profile. This is actually quite common practice in the industry. Whether it be Hines and CalPERS or AIG and Lincoln Properties, these transactions are generally smart business. You should be pleased with your investment.

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Re: American realty capital trust, Inc.

Postby mcaldwell » Tue Mar 29, 2011 1:25 pm

Thanks foz,

So did two different American Realty Reits buy this together? Or was it a joint venture with an outside company?

I initially understood it as my Reit paying some form of yield/interest to the other Reit, but maybe that's not the case.

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Re: American realty capital trust, Inc.

Postby REIT Wrecks » Tue Mar 29, 2011 11:18 pm

Foz, thanks also for your corrections to the "Non-Traded REITs Ranked by Total Assets" post. I think I mistakenly deleted that post when I moved things around here, but I will repost it and refresh the data when all of the 2010 10Ks come out, and I will include your correction.

I think mcaldwell's question is on point though. Joint venture purchases of real estate ARE commonplace, but they're usually arms length deals between two unrelated parties. If the ARCT deal is a joint venture between two related parties, and it is not a parri-passu structure involving identical economic interests in the same asset (I haven't yet read the filing), then perhaps mcaldwell might need to be a little concerned about conflicts of interest.

ARCT is definitely ahead of the industry in terms of attempting to align its interests with those of shareholders, so I am guessing/hoping that this JV reflects that philosophy. From the Q3 2010 10Q:

The Company, our board of directors and Advisor share a similar philosophy with respect to paying our distribution. The distribution should principally be derived from cash flows generated from real estate operations.


That's easy to say, but hard to do! Unfortunately, it's even harder if you have to give up 10% of investor cash just to sell your deal....

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Re: American realty capital trust, Inc.

Postby mcaldwell » Wed Mar 30, 2011 7:59 am

Thanks REITWrecks. I'd be curious to get your thoughts after reading the information. I believe the acquisition happened in December if that helps. The entity that bought the building was a "New York Recovery Reit". My financial advisor also favors ARC because of their perceived transparency but this deal seemed a little strange when he explained it.

Thanks for the help to both of you...

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Re: American realty capital trust, Inc.

Postby REIT Wrecks » Sat Apr 02, 2011 3:04 pm

mcaldwell - I've reviewed the filing. In fact, it is a loan to New York Recovery REIT (dressed up in the form of a jv equity investment) and this is not a good transaction for ARCT REIT shareholders. Foz is correct, joint venture transactions are very common ownership/acquisition structures, but that's like saying cars are common, so you should be happy with a clunker that gets 2 miles to the gallon.

There are several problems with this deal. First, this transaction was not reported to ARCT REIT shareholders in an SEC 8K filing when the deal closed, even though ARCT put up the vast majority of the equity required (81.72%) to buy these properties. In the interest of transparency, it should have been disclosed directly. Second, ARCT received no voting rights or control rights. Third, ARCT receives no upside, except for a 7% cumulative annual yield. Fourth, if the deal is sold at a loss to a third party, then ARCT will have a 100% pro-rata share of those losses. From the ARCT prospectus:

Generally, we will only enter into a joint venture in which we will control the decisions of the joint venture....We also seek capital gain from our investments.


So let's recap: ARCT puts up almost all the equity, gets no control, does not share in any appreciation or capital gains, yet takes a 100% pro-rata share in any losses if something goes wrong. Is this something anyone would do with their own money if they had a choice?

This is nothing more than an equity bridge loan for New York Recovery REIT, with off-market pricing and terms that are highly favorable to New York Recovery REIT ("NYRR"). To be blunt, American Realty Capital is using ARCT REIT shareholder cash to subsidize the launch of NYRR, and it's no wonder this deal wasn't reported to ARCT shareholders.

Foz may say that (1) NYRR will eventually raise the equity to pay everyone back (NYRR had only raised about $7.2 million in total as of March 31st), that (2) this is a low risk deal where the probability of losses is remote, and (3) that there is unaffiliated third party equity in the deal which validates the ARCT terms and creates an effective check on decisions by NYRR (CAMBR Company Inc, a real estate investment firm in Lynbrook, Long Island put up $1 million of the equity alongside ARCT).

I say so what? This deal represents a full 60% of the NYRR portfolio, NYRR invested almost none of its own cash, and based on the ARCT-NYRR-CAMBR operating agreement which you can read here, CAMBR got a much better deal than ARCT. Indeed, NYRR has the right to buy out CAMBR's $1 million interest separately from ARCT's interest. For example, if New York Recovery REIT were to buy out CAMBR's interest in accordance with Section 7.2(a), NYRR would have no corresponding obligation to purchase ARCT's interest under Section 7.2(b). As a result, NYRR could repurchase CAMBR's nominal $1 million interest tomorrow and ARCT would be totally stuck. Again, if this were to occur, ARCT would have NO VOTE. CAMBR does receive a lower preferred return (6.85%) than ARCT, but CAMBR has voting rights, while ARCT has none.

Foz, if you have any corrections to the above analysis, please feel free to add them. I do not believe that I have misinterpreted any of this, but if I have, please speak up. ;)

On a positive note, it does at least cover ARCT's dividend nut, and I was impressed that American Realty managed to grab a 7.2% cap rate on Bleeker St. commercial condos for NYRR. I would be curious as to whether that 7.2% was on in-place, year-one numbers, or some present value calculation that includes rent escalations. On the all-in purchase price of $35.98 million, the cap rate would be approximately 6.8%.

If you're interested in more detail, the capital stack may be worth disecting: According to the purchase and sale agreement, New York Recovery REIT purchased the five retail properties on Bleeker St. in Manhattan for a base purchase price of $34 million. According to the 8K, the purchase was partially funded with $21.3 million in debt, at a fixed rate of 4.29% (approximately 60% LTV). The balance of the purchase price was funded with $12 million in equity (81.72%), from an ARCT REIT affiliate, $1 million in equity (6.81%), from CAMBR, and finally $1,683,653.95 in equity (11.47%), from a New York Recovery REIT affiliate (from Exhibit A to the above-linked operating agreement).

The debt plus all that equity adds up to $35.98 million, which is 5.8% more than the $34 million base purchase price. Some of this was attributable to expenses like legal fees, title searches, appraisals, engineering reports, recording costs and loan origination fees, but the rest of it was attributable to sponsor fees, such as acquisition fees and financing coordination fees. Clearly, the fees charged by New York Recovery REIT are not nearly as outrageous as some other non-traded REITs, and American Realty Capital has made some superficial efforts to align its interests with shareholders, but this is a 5.8% drag on the deal that must be recaptured when the property is sold, and it highlights one of the many inefficiencies in the NTR structure. I would estimate that a direct purchaser of these properties would have incurred only 2-3% in transaction costs, all-in.

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Re: American realty capital trust, Inc.

Postby REIT Wrecks » Mon Apr 04, 2011 10:56 am

By the way mcaldwell, thank you for bringing this to my attention. ARCT REIT is sold to your financial advisor by wholesalers at Realty Capital Securities, which itself is a subsidiary of American Realty Capital. Realty Capital Securities has yet another subsidiary called the "Direct Investment Research Group," which is alledgedly promoting increased awareness of direct investments and education for financial advisors.

Amazingly, despite the ARC/RCS sales tentacles slithering all over the Direct Investment Research Group, they use the words "unbiased" and "increased transparency" in connection with these "education" efforts.

Kool-Aid, anyone?!

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Re: American realty capital trust, Inc.

Postby mcaldwell » Tue Apr 05, 2011 6:30 pm

Thanks REITWrecks, that's all a bit alarming. I guess I feel better that this is not an enormous investment for them (but still!).

Thanks for the additional insight about the Direct Research Group. That's something I'll keep in mind and be aware of.

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