Lapis tender offer for Inland American?

Lapis tender offer for Inland American?

Postby Whatyear » Wed Dec 29, 2010 6:48 am

Hi,

Is anyone considering the offer by Lapis Business Investment Trust for Inland American shares at $4.00? I know it seems low but I'm tempted by it, just so that I can put this invenstment behind me. I'm curious if others (who probably do more actual research than I do :)) plan to sell.

Nancy

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Re: Lapis tender offer for Inland American?

Postby ddo2 » Thu Dec 30, 2010 9:59 am

Nancy,

I think it depends on your situation. If you need the cash, then dump it. I don't need it now, so I'm waiting it out. IA seems in slightly better shape to me than some of the others, given their relatively strong cash position compared to others. But, I'm not sure I like the movement into MDUs they're making.

But, generally speaking, these tenders tend to be low on purpose. They get the desperate to sell out. You might do better with a third party secondary market sale (or not). Others can explain this process better than I can.

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Re: Lapis tender offer for Inland American?

Postby REIT Wrecks » Thu Dec 30, 2010 11:08 am

If price is the only consideration, I agree that the Lapis tender offer is low, and it really only makes sense if you have immediate need for cash.

I checked secondary market trades in Inland American from Q1, and the weighted average price of secondary market trades in Inland American shares was $6.88 (shares traded in a range from $7.27-$6.20). Inland American reported a Q1 book value of $6.71/share, so the weighted average secondary market price was slightly above book. As of Q3 2010, Inland American's book value had declined to $6.37/share (excluding non-controlling equity interests), mostly due to impairments and an increase in the number of shares outstanding. Evidently, there are still lots of people reinvesting through the DRIP. Nevertheless, the $4.00 Lapis tender appears to be cheap from this perspective.

As usual, however, Inland American is still living way beyond its means in terms of distributions. IA reported Funds from Operations ('FFO") of $190,825 through the first 9 months of 2010, yet they paid distributions of $312,345. This means that IA is overpaying the distribution by 163%, and this is why you should think carefully before reinvesting through the DRIP.

BTW, Inland American was one of the most actively traded direct investment programs in Q1, second only to Inland Western. There were 55 trades in Inland American, totaling $1.2 million in volume, as compared to 59 trades in Inland Western totaling $2.3 million in volume. This secondary market data is courtesy of the Direct Investment Spectrum, a subscription-based newsletter.

As for Lapis Business Investment Trust, they appear to be affiliated with MacKenzie Patterson Fuller, LP (the two share the same address in Moraga, CA). MacKenzie Patterson Fuller has been in the business of buying discounted secondary market shares in direct investment programs since the early 1980s. Basically, the strategy is to pick off thinly traded securities where a lack of information and liquidity create market inefficiencies that can be exploited. Interestingly, MacKenzie Patterson Fuller raises a lot of their money through the very same independent broker dealer channel that's used sell this schlock in the first place. It's an incestuous circle, and retail investors are typically at the bottom of the food chain. The good news is that if you choose to sell, your execution risk is probably very low (in terms of actually getting paid) -- but that's about all I can think of in terms of the attributes of this offer.

However, if you do need the cash immediately - and perhaps a loss for tax purposes - who knows when you'll actually get your money back from Inland American. This program is the largest non-traded REIT out there in terms of assets, and Inland American's size and lack of focus (IA owns multi-family, retail, office, lodging and industrial properties) will make it more difficult to take public. As you know, the Inland American redemption program has also been suspended indefinitely. If you're interested in getting some current price quotes, this thread contains some information on how to sell non-traded REITs in the secondary market. I hope this is helpful, and thanks for posting! :)

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Re: Lapis tender offer for Inland American?

Postby davephx » Mon Jan 10, 2011 8:46 pm

Just some facts that may have been distorted regarding Inland American Distributions from the 10K

Distributions
We declared monthly cash distributions to our stockholders per weighted average number of shares outstanding during the period from January 1, 2010 to September 30, 2010 totaling $312.3 million or $.50 per share on an annualized basis. These cash distributions were paid with $271.1 million from our cash flow from operations, $23.0 million provided by distributions from unconsolidated entities, $14.3 million gain on sales of properties, as well as excess cash flow of $59.7 million from prior years.

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Re: Lapis tender offer for Inland American?

Postby REIT Wrecks » Mon Jan 10, 2011 10:23 pm

Dave,

Thanks for the additional information, although I think your numbers come from the 2010 Q3 10Q, not the 10K, and the link to the 10Q is here. I did not distort FFO though; as I said, Inland American reported funds from operation ("FFO") of $190,825 through the first nine months of the year, which does not come close to covering the dividend. FFO is non-GAAP, and the difference between FFO and cash flow from operations is that FFO excludes non-cash depreciation and extraordinary items such as gains and losses on sales of property.

I am guessing that Inland American's "excess cash flow from prior years", whatever that is, would also be excluded. I look at both numbers, but most analysts focus on FFO.

Cheers, RW

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