RealEstateGuy, I agree, and I personally would love to take a more constructive view on this sector, but it's just not easy with all the warts.
With regard to Azut's contention that not much was bought in 2009-2010, it was absolutely factually incorrect, he knew it, and here's why:
Do you think Cole got a good deal on their $3 billion in the 2009-2010 environment, or a bad deal? Only time will tell, but it appears as though there was very low supply, and Cole had high demand.
As for Kimberly's contention that losemoneynow's post is "misleading", and that Cole REIT III is fully covering its dividend with MFFO, the latter half of her statement is factually correct
. However, in order for her make that factually correct
claim, she and Cole are using a definition of FFO that is not consistent
with the definition supported by the National Association of Real Estate Investment Trusts ("NAREIT"). So who is misleading whom?
Using NAREIT's definition, Cole's dividend coverage was actually negative
by roughly $7 million in Q1 2011 and negative
by roughly $18 million through Q2 2011.
In fact, using NAREIT's definition, dividend coverage was negative
by almost $80 million in 2010. This is cash out the door, and it must somehow be earned back in order to make investors whole. Again, did Cole get a good deal on its $3 billion in the above environment, when there was virtually nothing for sale, or did it not? Only time will tell, but for investors, if the answer isn't yes, there could be some considerable trouble down the road. Would anyone like to play kick the can with a stick of dynamite?
Some investors may be tempted to view this as a technicality, but it isn't. The difference between the two definitions can be attributed largely to the treatment of acquisition fees. In Cole's case, they earn an amazing 2% of the gross purchase price of whatever they buy, no matter what they pay for it, and this cash goes straight into Cole's pocket. Investors paid $44 million in acquisition fees to Cole in 2010, and an additional $16.6 million in acquisition fees went straight into Cole's pocket through the first six months of 2011. These fees are paid using investors' principal, which means there is LESS money available to buy income producing real estate.
With respect to losemoneynow's response to Kimberly, which she failed to answer, this egregious fee drag is one reason why the REIT is still forced to fund its 6.5% dividend using borrowings and proceeds from sales of new stock, not cash flow. As reported on page 30 of the 2011 second quarter 10Q, the year to date dividends of $87.8 million were funded as follows:
$62.5 million from operating cash flow
$22.7 million from selling new stock
$2.1 million from borrowings
.5 from the sale of an unconsolidated JV interest
Meanwhile, in just the first six months of 2011 alone, Cole managed to pull a total $38 million in fees and expenses out of the REIT (page 20), and this totally ignores the ridiculous 7% commission skimmed of the top by your friendly financial advisor.
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