open letter to "REITWRECKS" Concerning ARCT

TheHammer
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Re: open letter to "REITWRECKS" Concerning ARCT

Post by TheHammer » Wed Mar 07, 2012 1:52 pm

I have been a silent observer of this site and following the NTR industry for some time. After reading the comments on ARCT, I decided to make my first post to this board. I am simply amazed by how much capital NTR’s have raised over the years given the high sales loads, egregious advisory fees (acquisition, asset/property management, etc). They are packaged and sold to retail investors as non-correlated investments, with above market dividends, share price stability and provides the same access to real estate that institutional investors have. Unfortunately, the assets are correlated, just because the share price is fixed, doesn’t mean that asset prices don’t fluctuate, and at best only 88% of the capital raised is available for acquisitions; the above market dividends are most likely non sustainable, as they are not always covered by property cash flows, while KBS, Hines, Dividend Capital/Black Creek all invest institutional monies the management fees for which they charge to their institutional clients is far less than the REIT is paying. These companies are only in the NTR business for the management fees and sticky completely passive retail capital. Additionally, the NTR structure of paying out consistent monthly dividends makes it extremely hard for managers to not overpay for real estate, as they are pressured to continually buy assets to reduce the cash drag on the portfolio in which they are paying dividends on. FINRA 11-44 targets a lot of the inherent problems associated with these products and while the new NAV + commission model is more investor friendly, the jury is still out on whether it can attract significant investor monies. The saving grace will be if the RIA community accepts the structure, but I believe most will still stay clear due to the limited liquidity, external management compensation/structure and increased capital markets/borrowing costs compared to their public peer group.

Regardless, I think what REITWRECKS (Please correct me if I am wrong) was pointing out in an earlier post is that was this the best investment for a client given the risks associated with the investment? 1.blind pool, 2. unsupported dividend = dilution, 3. no surety of liquidity, 4. conflict laden management structure (ARCT is better than most), 5. NNN lease burn=reduced residual value of assets w/o cap rate compression.

Additionally the post earlier about having "non taxable dividends" was due to the fact that most of the dividends paid were classified as return of principle...aka they paid you your own money back!

Anyway let’s compare ARCT's returns to its now public peers. I chose January 25, 2008 as the investment date because that was the day ARCT went effective, and it was prior to the historic March 09' REIT lows in the public markets. I will also include the investment date of March 6, 2009 because that was pretty much that absolute low in the market.

Here are your returns if invested $100k in ARCT, Realty Income Corporation "O", and National Retail Properties "NNN".
Returns.JPG
Returns.JPG (43.37 KiB) Viewed 15469 times
As you can see from the chart, investing in either “O” or “NNN” generated a return in excess to ARCT of between 15% and 151%, depending upon time of purchase and underlying stock. While ARCT was able to generate positive returns for its investors (and I commend them) it was arguably an inferior investment for the client.

masterxbeam
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Re: open letter to "REITWRECKS" Concerning ARCT

Post by masterxbeam » Thu Mar 08, 2012 9:15 am

Hammer:

The point of me starting this thread was for REITWRECKS to acknowledge in a much more public way that he was WRONG about is analysis of ARCT and all of the negative posts that he started in this forum. Go back and actually read these posts for a reference. If you were to believe his slanted facts and bold accusations ARCT would be trading at 5 dollars right now.

As for the triple net lease comparison for "O" and "NNN", I brought that into the mix to compare the portfolio holdings of ARCT with those other traded REITS to show that ARCT's lease expiration dates as well as occupancy AND credit quality of the tenants is far superior to that of "NNN" and "O". PLEASE PROVIDE ME A CHART OF THAT INFO since you like charts so much.

The reason for this comparison is that once Arct trades for a bit, its comp numbers should run parallel to these other respectable, well established traded REITs.

As for your "return" comparison...... there is one problem. You go back to 2008 when ARCT was a non-traded REIT and try to compare the total returns to 2 traded REITS ....... is that a fair comparison ? The only way it would be fair is to let ARCT trade for 1 year publicly just as "NNN" and "O" have for years and then compare the 1 YEAR RETURNS on March 1st 2012. Apples to oranges is not a fair analysis and would be thrown out by an analyst on the street.

Finally, I could care less WHY the dividend was tax free this past year ......I just like that it was and that my clients were still able to book in a 5 % profit on their principal on top of an annual dividend of 7 % virtually tax free...... would you be happy with those numbers Hammer?

I know we are !

TheHammer
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Re: open letter to "REITWRECKS" Concerning ARCT

Post by TheHammer » Thu Mar 08, 2012 11:55 am

Masterxbeam:

I appreciate your response, but I am sorry to have to disagree with you. I haven’t had the time to go back and review all of RWRECKS comments regarding ARCT, but I am assuming his comments were over an extended period of time in which there has been a lot of cap rate compression in net leased assets, providing a significant “tail wind” for all REIT’s both public and private enhancing portfolio values. According to the 4Q11 PWC Real Estate Investor Survey cap rates for net leased properties have compress back to slightly below 4Q07 levels!
NetLeaseCapRates.JPG
NetLeaseCapRates.JPG (25.15 KiB) Viewed 15383 times
I am sorry, but your statement about my "return" comparison is quite ridiculous. Investment returns associated with commercial real estate are compared by sophisticated investors by the underlying risk of the asset, not the wrapper in which the asset is held. Meaning…investors break down commercial real estate into the various asset classes (office, industrial, retail, multifamily, etc), then they look at the risk profile of the deal (core, core-plus, value-add, opportunistic, development). Whether the asset is held in a NTR, private REIT, public REIT, private fund, SPE it doesn’t matter, what matters is the return that is generated to the investor and how it compares to similar risk assets. In this case, an investor would have had a superior return to ARTC if they invested in “O”, or “NNN” and it would be deemed by “sophisticated investors” as a fair comparison.

Your statement, “I could care less WHY the dividend was tax free” is pretty ignorant, and I am sure your investors would have cared! As you probably know, when any portion of dividend contains your own principal, it is dilutive to all the shareholders, and is really not in the best interest of the REIT. The only reason NTR’s do this is to attract new capital, if their stated dividend was less than their NTR & public peers they are afraid they won’t be able to raise money regardless of the commission they pay the broker. There is a reason why all NTR’s still raising capital pay a dividend betweens 6-7%. Once they are done raising capital and have lured enough “dumb money” into their REIT they cut it to something that is sustainable!Outside of W.P. Carey, I am not aware of a single non traded REIT that has closed their offering that hasn’t reduced their initial dividend yield! Most will blame this on commercial real estate values are down due to the great recession, which is kind of BS because they were never sustainable from DAY 1, and according to the CHART above, we have surpassed 2007 pricing for net leased assets! (You can thank the Fed and Mr. Bernanke for this!)

A lot of Madoff investors had a similar belief to you and they only started caring when the monthly dividend checks stopped!

At least ARCT was not subject to the old Wall Street joke “The broker made money and the brokerage firm made money – and two out of three ain’t bad.” You wouldn’t have gotten paid a 7% commission, eaten all those steak dinners with your Realty Capital Securities wholesaler and went on an all expense paid DD trip to NYC, at the expense of the ARCT shareholder, if you had put your clients in a public REIT. At the end of the day your clients still made money, so I guess a congratulations is in order!

ipfreely
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Re: open letter to "REITWRECKS" Concerning ARCT

Post by ipfreely » Thu Mar 08, 2012 1:36 pm

ARC increased their yield since inception until close out. There are also several that have maintained, just for the record....Paladin comes to mind...and their book is paltry. Now, you can debate how the previously described did this, but the fact of the matter is NTRs outside of WP Carey achieved steady or increasing divys too.

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REIT Wrecks
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Re: open letter to "REITWRECKS" Concerning ARCT

Post by REIT Wrecks » Thu Mar 08, 2012 2:05 pm

Fat target. BHMF REIT 1 also increased it's "yield" through close out, from 6.5% to 7%. That is a very dangerous game, and without price signals, those BHMF investors had no idea what was going on until it was too late.

Based solely on these criteria, ARCT was far more risky than either NNN or O, and it should therefore deserve a higher risk adjusted yield premium, and generate higher overall returns. This not bad, necessarily, but all risk has a price. Apples to Oranges, indeed!

ipfreely
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Re: open letter to "REITWRECKS" Concerning ARCT

Post by ipfreely » Thu Mar 08, 2012 2:17 pm

RW, You are right...NTRs lack the feed back mechanism that tells you the latest "yield" increase was nothing more than smoke and mirrors. The illiquid nature of NTRs and the fact that there are generally, just better (fundamentally) and more liquid investments our there turn the NTR into a opportunity cost of capital question and they add another layer or two to the risk profile... I am certain that many customers just like the fact that they "see" $10 on their statement and not the true market value of the investment. Oddly enough, willful ignorance gives people peace of mind. :?:

RealEstateGuy
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Re: open letter to "REITWRECKS" Concerning ARCT

Post by RealEstateGuy » Thu Mar 08, 2012 3:04 pm

You are all missing the KEY advantage of the NTR vs. publically traded. You can buy them late in the offering for the same $10 share as when new! So, using the examples above - who had the guts to buy the TRADED REITs in Feb 2009? VERY FEW! However, after seeing the traded brethren appreciate 100% in value off the bottom, you could have stepped in and bought the NTR for the same $10 as it was at the bottom! IF, instead, the traded reits had continued to plummet and real estate values were not rec overing, then don't buy the NTR.

Is this unfair to the early investors? Sure. Do I care? Nope, 'cause I'm a late or never investor, depending on how the assets have liekly performed.

Investing isn't easy. You have to be a bit clever and find some advantage where you can. NTR's are a great way to do this in certain markets.

TheHammer
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Re: open letter to "REITWRECKS" Concerning ARCT

Post by TheHammer » Thu Mar 08, 2012 5:25 pm

RealEstateGuy,

You are also missing the key to all real estate investing, whether you're buying a non traded REIT, public REIT it doesn't matter, you need to perform an analysis of the portfolio in which you determine the current NAV. You then make your own forecasts for economic trends, asset trends, liquidity, management qualifications, etc. and determine what you think the fair market value is. If in the case of a non traded REIT you think the price of $10 is below the fair market value, by all means buy as much as you desire. In the case of a public REIT, if you can buy at a discount to current NAV then its good deal assuming everything else checks out...Unfortunately, most NTR's current NAV's are far less than the $10 offering price, and it takes a lot of cap rate compression and public market liquidity premium to make up the difference. As far as your buying at the end of an offering strategy, I am not sure the 5% you made with ARCT was worth the risk, but to each his own! That strategy hasn't worked out so well with the other NTR's that have closed their offerings recently...(ie Wells REIT II, Div Cap TRT, Cole II, BH MF REIT, etc.)

What makes this forum so great is that we are all entitled to our own opinions...

jbnails
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Re: open letter to "REITWRECKS" Concerning ARCT

Post by jbnails » Fri Mar 09, 2012 5:31 am

TheHammer - I agree, a great forum to post opinions and I like seeing personnal attacks eliminated.

As RealEstateGuy stated, I was a late investor to ARCT, a key factor for my broker. I believe this gives him the opportunity to see the REIT positions and do more research (or at least I hope). In this case, I bought in during May 2011 and if I can sell my shares for the minimum tender offer, I will realize 11% gain in 10 months (or 12+% annual rate). Considering this REIT arena is a portion of my retirement funds, I believe I am hedging the equities daily market fluctuations and gaining 10+%.

I guess I need to start tracking the traded REITs to see if they correlate to the market flucuations (but I think this is unlikely). Has anyone done such a thing? I am looking for investment avenues that do not correrlate with the stock market.

Excellent posts the past few days, thanks to all for posting.

Believethis
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Re: open letter to "REITWRECKS" Concerning ARCT

Post by Believethis » Fri Mar 09, 2012 7:07 am

Before concluding on whether or not the listing was successful, everyone needs to wait until the tender offer period ends.

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