NetREIT and United Development Fund

NetREIT and United Development Fund

Postby Rex Reit » Fri May 06, 2011 11:22 am

Those are two of the privat placements my commission-hungry broker convinced me to put my money into. One of the greatest difficulties I have with both of them is to ascertain whether they are run-of-the-mill rip-off companies, being that the "cash dividends" and "interest" are my capital being returned to me, or if the numbers are actual cash, not coming out of my capital.

NetREIT sent me a notice just the other day proudly announcing that it was paying its 48th consecutive quarterlly dividend, which for me amounted to $748 dollars. I have owned 5000 shares of NetREIT for 2.5 years, and the company intends to go public in 2013. Their financials make it very hard to understand where, except from capital, they could be finding the money to pay such cash dividends. Also, I think that if they are able to put together the kind of money it takes to get listed on a major exchange, the price of the stock will immediately plummet. The $748 dividend NetREIT is paying would, by the year 2013, come to about a 30% gain, and then of course I'd have my 5000 shares of the now publicly traded company...

Does that or does that not sound like "pigs flying?"

An officer at United Development Fund assured me that the 9.75% simple yearly interest I'm receiving is not coming from my capital because UDF is in the business of making loans. He said that in 2013 I may be eligible to redeem my entire 50,000 without penalty. Does that sound real? Someone wanted to know why UDF's clients can't find cheaper places to get loans, but I do know that with things the way they are, there could well be clients willing to pay that much interest. The loans are short term--- 12 to 20 months.

Any help/comments would be greatly appreciated.

Thank you.

Rex Reit
 
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Re: NetREIT and United Development Fund

Postby REIT Wrecks » Sun May 22, 2011 3:42 pm

Hi Rex,

With respect to NetREIT, that sounds like pigs flying. Current book value is only $6.25 per share (total shareholders equity of $79,755,275 as of year end, including non-controlling interests, divided by 12,770,025 shares outstanding at March 24, 2011) The reason book value is below the $10 offering price is mostly because they have been busy shoveling cash out the back door by the truckload, while telling you it's a dividend.

Unfortunately, dividends come from earnings, and there have been no earnings in the past two years. This is why you think the "financials make it very hard to understand" where the dividend is coming from. Don't be so critical of your analytical skills. The fact is, anyone would have a hard time understanding how a company with no earnings could pay a dividend!

Here are the numbers: NetREIT generated generated Funds From Operations of $596,076 and $218,810 in 2010 and 2009, respectively, yet paid cash dividends of $2,836,516 and $2,399,523 during the same years. Cash flows from operations were only marginally better than FFO. In fact, by NetREITs own admission:

NetREIT wrote:the Company reported net losses in both 2010 and 2009, these cash dividends represent a return of capital to the stockholders rather than a distribution of earnings.


Despite having commenced operations in 2005 with a preferred stock offering (the common stock offering began in 2006), the Company says that "until proceeds from our offering are fully invested and our acquired properties are generating operating cash flow sufficient to fully cover distributions to our shareholders, we intend to pay a portion of the distributions to our shareholders from the proceeds of our ongoing common stock private placement offering or from borrowings in anticipation of future cash flows, as deemed appropriate."

I don't know about you, but it's now mid-way through 2011, so I'm not sure why these guys still can't cover their dividend.

Finally, I wasn't sure what you meant by the following:

Rex REIT wrote:The $748 dividend NetREIT is paying would, by the year 2013, come to about a 30% gain, and then of course I'd have my 5000 shares of the now publicly traded company...


Does this mean that you have some sort of expectation that this company would go public? Right now, I would say that's even more impossible than pigs flying. NetREIT has no real geographic or asset focus. The own a little apartment building in Wyoming, interests in a bunch of partnerships that lease model homes to single family home builders (that's a growth business!), eight smaller office buildings (one was carved up into units ranging from 178 to 4,100 square feet and was only 53% occupied - exactly what I'd expect from Aurora, Colorado), a handful of smallish retail properties (including a 7-11 in Escondido) and five self-storage properties. I think that this lack of focus, their complicated ownership structure (partnership soup), what seems to be a non-institutional quality portfolio, and their lackluster operating history will prevent a splashy IPO anytime soon...maybe they should first focus on trying to make some money with what they've already got.

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Re: NetREIT and United Development Fund

Postby Rex Reit » Tue May 24, 2011 7:54 pm

Hi. My apologies for not saying which United Development Fund I am boondoggled in. It is UDFIII. Actually, to me, with my tiny bit of knowledge about how to read financials, it does look as if UDF could actually be paying me 9.75% simple interest per year. There also appears to be a chance I might be able to exit the fund with all my capital intact in 2013. Not likely, but is a possibility. And if I can't, and I am in fact making a simple 9.75% a year on the fund, that's not so bad, I'd say.

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