Value Destruction Across the Board

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losemoneynow
Posts: 22
Joined: Tue May 11, 2010 5:29 pm

Value Destruction Across the Board

Post by losemoneynow » Tue Sep 13, 2011 10:17 am

http://www.costar.com/News/Article/Gramercy-Giving-Up-Keys-on-900-Bank-Properties-to-KBS/131907" onclick="window.open(this.href);return false;

The above link calls to mind the origins of this chain of value destruction when Gramercy acquired AFR, formerly run by Nick Schorsch, for what was deemed at the time a substantial discount. For a trip down memory lane see the following link:

http://www.forbes.com/2007/11/06/gramercy-afr-reits-pf-re-in_ps_1106realestateintelligence_inl.html" onclick="window.open(this.href);return false;

As you can see, Nick was run out of Dodge at AFR for his acute ability to lose money for shareholders and, now it would seem, Gramercy has picked up the torch and continued down the trail of tears by tossing the keys to these net leased assets back to KBS (Oops! How are those shareholders doing??) Goldman Sachs and others.

The "salesy" nature of ARC's press releases about the safety of net leased assets and the self congratulatory nature of the prose written into the disclosures by Nick and his mediocre management team through the recent process of taking American Realty Capital Properties public seem to reek of spiking the ball before crossing the goal line. One only need study the history of AFR and the pain it inflicted in the past on investors, and the losses imposed on investors in Gramercy and KBS, to understand that net leased assets have a downside. As someone who has been in this industry much longer than Nick Schorsch I can assure you that these assets are not as "safe" as these folks would have you believe.

stmonica
Posts: 1
Joined: Wed Sep 14, 2011 2:26 pm

Re: Value Destruction Across the Board

Post by stmonica » Wed Sep 14, 2011 2:50 pm

Are any of these REITs better - safer - investments than others? Or do they all have the same or similar problems? I'm trying not to get too discouraged but, based on what I'm reading, the reality does not sound promising.

losemoneynow
Posts: 22
Joined: Tue May 11, 2010 5:29 pm

Re: Value Destruction Across the Board

Post by losemoneynow » Wed Sep 14, 2011 4:28 pm

Stmonica,

Determining which nontraded reit might be safer or better than another is a very arduous excercise. What astonishes me about the enormous sum of money that has been raised in this industry is that the investor is getting his/her advice from the salesman. In this case the salesman (financial advisor) has every incentive (thanks to fees paid by the REIT and its advisor) to sell you something. Why aren't investors willing to dig into this a little deeper? Buying financial products from advisors with no skin in the game should cause potential investors tremendous concern. Furthermore, the salesman selling the client is being sold by the salesman (wholesaler) from the REIT. Don't underestimate the hand-to-hand combat that this entails. These sponsors (REITs) are out there pounding on these advisors to recommend their products to clients. With so many programs out there this process can get ugly (i.e. trying to stand out in a crowd). Nowhere in this chain are incentives aligned. The whole process puts the burden on you to read EVERYTHING and it is a "buyer beware" situation.

Where do you go for independent analysis and advice? Nowhere. At least with publicly traded reits there is an abundance of third-party independent analysis available from which to make a decision (I realize this analysis can vary in quality but at least it's another data point). With nontraded reits, if you don't wish to blindly accept your conflicted advisor's advice, you have no resources (certainly none that are truly independent) to access to make an informed decision. Thus it is up to you to read all the disclosures and filings to decide if the real estate these reits own is really real estate you want to own and that they did not overpay for it. Worse, if its a blind pool, you are really taking a stab in the dark. Do you know the management team? Are you being told they are good guys by an advisor or do you have first hand knowledge that you aren't dealing with sharks? Do you understand the implications of an illiquid investment? Has the management team taken programs full cycle? What were the results? Have you run background checks on key management (I know several that would prefer you not do that)? I can go on and on. Publicly traded reits as an asset class returned 30% last year...they are having another strong 2011. You are getting equity returns for equity risk and you're liquid! If you like reits stick with the publics, liquidity is not something you should give away because an advisor downplays its significance and wants you focused on yield. Hope that helps.

Shareholder2
Posts: 4
Joined: Mon May 16, 2011 5:43 am

Re: Value Destruction Across the Board

Post by Shareholder2 » Wed Sep 14, 2011 6:35 pm

Was this posted the wrong forum? This sounds like a KBS problem. See my earlier post on this EXACT topic 4 MONTHS ago. No one (including, notably, REITWrecks itsself) said anything about it then. No one else even picked up the conversation over on the KBS forum of this website to make that known to KBS investors (not that there’s anything they could have done about it, since redemptions are closed) There’s still only one post in the KBS forum, even though they have now publicly hitched their wagon to a dying horse. They’re now the proud owner of 500 properties that are severely underwater and will pay $10M a year to Grammercy for the privilege of owning it.

And I’ll say it again, maybe someone will llisten a second time instead of rehashing the senseless Schorsch drivel that you've now put out twice: this terrible deal that went sour was crafted by KBS and Goldman Sachs a year and a half after AFRT underwent a management change. Don’t forget that the world was already starting to change at the time that AFRT’s board decided to make a deal with the devil and sell their
company and they saw the writing on the wall. KBS’s shareholders are left holding the bag. KBS delayed providing information to their investors and let the deal be extended time and again for an incredible 6 months from the original termination date before telling investors that they were taking over the properties. And they still have not recognized any sort of imparement relating to this investment, which is a sizeable portion of their entire portfolio of assets.

Did anyone read the 8K from KBS? [url]http://www.sec.gov/Archives/edgar/data/1330622/000133062211000008/kbsi8k.htm[/url]. If you did you'd think that everything was going awesome with these properties. In truth, the underlying real estate is doing ok (nothing worse than any other pool of assets that was acquired before 2008). There are two massive problems. First, KBS hasn't informed investors that this large investment isn't going to continue to perform and their value should be diminished. The second problem is the massive amount of mezzanine debt that GKK used to complete the AFRT acquisition. The executives that are now at ARC had nothing to do with the mezz. In fact, even Schorsch's successor, the late Hal Pote, had nothing to do with it. It was two CEOs later.

I appreciate the commentary but lets put this conversation where it belongs and not drag unrelated companies into it. As you say, you've been "part of the industry" for 20 years. As someone who is so in touch with (and apparently quite opposed to) non-traded REIts I am still shocked you didn't post this on the KBS forum. I'll do you a favor and post this reply there so that interested folks can read it themselves.

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