Cole REIT Has Dividend Problems

We did not have sex with that Pension Board!
cloudybright
Posts: 3
Joined: Fri Jul 15, 2011 10:21 am

Re: Cole REIT Has Dividend Problems

Post by cloudybright » Tue Jul 19, 2011 3:05 pm

Bob: No, the adviser is not an Allied associate.
The Ray Lucia's "Buckets of Money" theory. Lucia's bucket analogy has been around a long time and has become a cliche for many theories, even a movie called "The bucket list" IIRC - But yes, the adviser's approach is similar.
Any real estate is risky and our approach is highly speculative - I recognize that.
(BTW, thanks for the spreadsheet.)
Your post deals with the "now" but our horizon for cashing out is the far future, assuming Cole doesn't go bust first.

Cole dividends are now being reinvested, but starting in January we're going to use them as cash flow. At which point they'd better pay out or our adviser is going to get an a$$ chewing.
Another note about real estate in general, building costs have been going up.
I've heard this from construction people as well as my insurance agent.
But the value of buildings is currently stagnate.
Their real value is not reflected in reality. Which is why my personal point of view is that now is a buying opportunity, even if values fall even more, the deals only get better.
There is a hidden pressure on building values. Wait awhile.

Again, Cole is in the high risk bucket and should be considered as such.
Is it reasonable to compare Cole to Treasuries? Perhaps, but only for the exercise.
Love to see anything you have regarding Lucia's bucket list theory. . .

bobsmith
Posts: 29
Joined: Wed Apr 28, 2010 7:28 pm

Re: Cole REIT Has Dividend Problems

Post by bobsmith » Tue Jul 19, 2011 6:18 pm

Cloudy,

Which Cole REIT are you in? Presumbably II or III?

I agree that you need to take a long-term perspective with many investments and that the value of commercial real estate may be higher in the future than it is today. However, it is really important as an investor to have an idea of how much an investment is likely to pay you above what you can get by holding another investment of equivalent horizon that is as low risk as you can get. In this case that least-risk (I will not say no-risk with the current debt ceiling garbage going on) is a US Treasury, or more specifically, a Treasury Inflation Protected Security (TIPS).

Cole does not need to go "bust" for you to get back in the long-term a lot less than what you put in initially. The problem with most of these NT REIT structures is that this outcome is a whole lot more likely than one in which your total returns are 7%+ due to the fees being paid up-front and the fact that the REIT sponsors are incentivized to put money to work, not to do great deals.

You may very well get your money back with a return (or maybe not), in the long run, in any of the Cole or other NT REIT transactions. But if you are being sold 6-7%+ returns then you are unlikely to achieve these given the fees and conflicts. And if you are being sold something much less than this, don't you need to ask yourself why you don't just go and buy Treasuries or something else that is less risky? 30-year Treasuries are yielding >4%. A diversified portfolio of long-term high-grade corporate bonds are 5%+. Buying triple-net commercial real estate leases is not so different than buying corporate bonds, except with more risk. You should expect a signficant yield premium over what a tenant's bonds are yielding. The expected return on many of these NT REIT deals is no better than, or worse than, the yield on the bonds of the companies renting the properties in the portfolios after the fees taken out.

There are plenty of no-load, low fee bond funds and ETFs out there that can generate reasonable (and real) cash flow that are liquid. If you need the cash flow, then why try and get it from your "high risk" bucket 3?

I don't have a ton of views on Lucia's Buckets theories other than to say that matching assets with liabilities (or quasi-liabilities, like the need for cash in retirement) is sound practice. But I also think that Lucia distorts this practice in the way that he recommends people to invest in a bunch of stuff (like NT REITS and variable annuities) that pay very high commissions and that he is essentially just the marketing arm for a brokerage firm and that all his views should therefore be taken with an enormous grain of salt. I have written about my concerns with his business practices (for which I will probably have the pleasure of being sued based on comments from others out there on the Internet - Ray apparently doesn't take kindly to critics see: http://www.sethhettena.com/2010/ray-lucia-defamation-threat/.." onclick="window.open(this.href);return false;.) on this forum here: http://www.reitwrecks.com/forum/viewtopic.php?f=29&t=265" onclick="window.open(this.href);return false;

cloudybright
Posts: 3
Joined: Fri Jul 15, 2011 10:21 am

Re: Cole REIT Has Dividend Problems

Post by cloudybright » Wed Jul 20, 2011 7:11 am

Hey Bob,

Yes. . .it is III
As for Lucia, last I heard of him was some 20-years ago when he was a radio entertainer - that's when he developed his bucket list.
As for your post, it would seem that you suggest staying in all bonds, treasuries, and other non-speculative low risk items without any diversification. Your promoted arguments are sound but seem a bit narrow - especially if one is already diversified in a manner that already includes your proposals.

bobsmith
Posts: 29
Joined: Wed Apr 28, 2010 7:28 pm

Re: Cole REIT Has Dividend Problems

Post by bobsmith » Wed Jul 20, 2011 11:33 am

Cloudy,

Sorry if that's how it came out - I am not saying that you should be all in fixed income. However, you mentioned that you would be using the Cole dividends as cash flow in the near-term. If these distributions (as they are not all real dividends, a lot is just your own money coming back to you - in 2010 45% of the dividends Cole III paid were classed as a return of capital) are important to you then I would question why you would invest in something so risky to get them? If it is a long-term investment then you shouldn't be worrying about the current cash flow too much.

Diversification is important, but not at the expense of returns unless you are looking to hedge a specific risk. Investing in something with a near-zero expected real return (which is arguably what you have with most NT REITs) just because it is a different asset class than something you already hold is not a sensible approach. NT REITs could possibly provide an inflation hedge, but only in the long-term as there is no way that rents and therefore the dividend would keep up in an inflationary environment. And you still have an illiquid asset. Cole III invests in triple-net leased properties with investment-grade tenants. The cash-flows are therefore dependent on the continued health of highly-rated big companies - this is not diversification versus corporate bonds. Your diversification comes at the end of the lease, because you own some dirt and a building. But this just means your position is way more risky than a bondholder and that you should be paid a big premium vs. the bonds to take the risk, which you are not getting.

I think that the problem that you might face, and that a lot of people out there face, is that you need more income from your investments than is possible to generate on a low-risk basis in the current interest rate environment. Is this a fair assessment? Are you essentially being forced to "chase yield" in order to make your personal income statement work? This is what I fear happened to a lot of people who were sold this stuff - they look at the yields on other investments and run the numbers and it just doesn't work and these 6-7% "yields" magically make everything ok. Unless (until?) Cole III starts to cut the dividend, which it has done in Cole I and II already. And of course the thing you paid $10/share for now has a book value/share of $8 (as at March 31). If I were you, I would look to redeem now while you still can as, depending on how long you have held your shares, you could redeem for about what you paid and still have gotten your dividends over the holding period. In fact, this may be the best possible way to play these investments - invest in the new deal and then get out right at 3 years at par, before they have to post the new NAV (which is very highly unlikely to be $10+).

Bob

bobsmith
Posts: 29
Joined: Wed Apr 28, 2010 7:28 pm

Re: Cole REIT Has Dividend Problems

Post by bobsmith » Wed Jul 20, 2011 4:10 pm

Ooops - I managed to forget that Cole III already cut its dividend, after it raised it in 2009 and 2010 order to drive more sales, earlier this year as was pointed out by RW: http://www.reitwrecks.com/forum/viewtopic.php?f=8&t=116" onclick="window.open(this.href);return false;

Cloudy, seriously, get out of this while you can. There are plenty of other, better, places to take risk if that's what you really want to do (I would suggest finding a fiduciary advisor rather than a broker to help you, though). Others heeded the advice provided on this site last year and got out of some of the Apple REITs before getting locked up. They are likely pretty happy with this now.

A question for you (and any others out there who are Cole or other NT REIT investors): If you read this and the several other Cole III threads on this forum (not to mention all the other threads), which include very detailed memos by fiduciary advisors clearly stating the issues, what makes you want to "stay the course" with this product?

RealEstateGuy
Posts: 16
Joined: Thu Sep 01, 2011 10:58 am

Re: Cole REIT Has Dividend Problems

Post by RealEstateGuy » Thu Sep 01, 2011 11:41 am

bobsmith, I read your comments here because I am currently considering adding Cole 3 to my portfolio because I believe they have enough properties purchased for a low price during the financial collapse to overcome the costs, etc. I own Behringer Harvard Multi-Family for this reason (as I know the multi-family real estate market has recovered a ton) but haven't pulled the trigger on Cole 3 so I am learning more about it. I do think it is incorrect to lump 1, 2 and 3 together in a discussion because they were obviuosly buying properties in VERY different market environments. So, while I see all the points on 1 and 2 as sounding logical, I wonder if 3 is enough different due to when they have been buying properties. Any input on that?

I will disagree with one thing you said when comparing the REIT ownership to bond ownership in the same companies... You called the real estate "dirt and a building" which you imply is worhtless or something? Why isn't that better security than an unsecured corporate bond? Is it 100% security? Not even close, but i do prefer it to nothing.

azut
Posts: 4
Joined: Wed Aug 10, 2011 11:36 pm

Re: Cole REIT Has Dividend Problems

Post by azut » Tue Sep 13, 2011 10:22 am

bobsmith...

So how do you explain my personal investment in COLE REIT III over the last 2 years? I invested $50,000 in August 2009. I have received right around $285 per month, on average, over a 24 month period. That is a cumulative return investment-to-date, of 13.5%. How is that a "flat" or "negative" investment return? As far as I know, Cole REIT III is in good shape b/c of when they started buying properties...mostly AFTER the credit crisis of 2008, and subsequent devaluation of equity markets and real estate. COLE REIT II is obviously not going to have fared as well b/c of the timing of the fund. Duh. That doesn't take a spreadsheet or a CFA or CIMA to figure that out. I like COLE REIT III b/c let's see, they invest in companies I like & use. Microsoft, AT&T, Walgreens, CVS, Home Depot, etc. Doesn't take a rocket scientist to figure out that those are good companies that are going to continue to pay their rent as contractually obligated to do, with built-in rent increases for a decade or more to come. I'll take my chances thank you very much.

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

Re: Cole REIT Has Dividend Problems

Post by losemoneynow » Tue Sep 13, 2011 1:34 pm

Azut,

Watching you gloat all over this website is irritating. None of your investments have gone full cycle so perhaps you should wait and see what your returns are in the final analysis. Cole REIT III is not covering its dividend fully from cash flow from the properties. Read the 10Qs and Ks. As an industry professional I can tell you that the financial crisis did not yield "good buys" as there was generally very little for sale during the height of the crisis. Transaction volume slowed to a trickle. As things have calmed down post-crisis, prices have shot up and cap rates compressed, making the most of the deals Cole has acquired (and those in any other nontraded reit for that matter) dilutive to their dividend yield, hence their inability to cover their dividend. So while you may be excited about your divvies, just know that capital is eroding behind the scenes to pay them.

kimberly_smith
Posts: 1
Joined: Tue Sep 13, 2011 5:23 pm

Re: Cole REIT Has Dividend Problems

Post by kimberly_smith » Wed Sep 14, 2011 10:24 am

The post by losemoneynow on 9/13 is misleading. Cole REIT III is fully covering its distributions with modified funds from operations, the principal metric utilized by the industry in assessing the overall strength and sustainability of distributions. See p. 26 of our 10-Q for the quarter ended June 30, 2011 and p. 28 of our 10-Q for the quarter ended March 31, 2011.

At the end of June 2011, Cole REIT III held 548 assets net-leased on a long-term basis to high-credit quality corporations. The fund is diversified across 43 states and 45 industry sectors, with an acquisition value of approximately $4 billion ($3 billion of which was purchased in 2009 and 2010), an average remaining lease term of nearly 15 years, and an occupancy rate greater than 99%.

The foregoing commentary from Cole responds to factual inaccuracies and/or misrepresentations in the material previously posted. Cole management stands behind the accuracy and completeness of Cole REIT disclosures, which can be found on the SEC’s website at http://www.sec.gov" onclick="window.open(this.href);return false;. We encourage readers to visit our website at http://www.colecapital.com" onclick="window.open(this.href);return false; for additional information about public non-listed REITs and Cole Real Estate Investments.

Kimberly J. Smith
General Counsel, Capital Markets
Cole Real Estate Investments

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

Re: Cole REIT Has Dividend Problems

Post by losemoneynow » Wed Sep 14, 2011 10:54 am

The following is copied directly from the the most recent Cole REIT III 10Q, as filed with the SEC:

============================================
During the six months ended June 30, 2011 and 2010, respectively, we paid distributions of $87.8 million and $41.7 million, including $49.6 million and $24.3 million, respectively, through the issuance of shares pursuant to our DRIP. The distributions paid during the six months ended June 30, 2011 were funded by net cash provided by operating activities of $62.5 million, proceeds from the issuance of common stock of $22.7 million, return of capital from the Unconsolidated Joint Ventures of $452,000 and borrowings of $2.1 million. The distributions paid during the six months ended June 30, 2010 were funded by net cash provided by operating activities of $13.2 million, proceeds from the issuance of common stock of $17.9 million and borrowings of $10.6 million. Net cash provided by operating activities for the six months ended June 30, 2011 and 2010, reflects a reduction for real estate acquisition related expenses incurred and expensed of $22.7 million and $17.9 million, respectively, in accordance with ASC 805, Business Combinations. As set forth in the “Estimated Use of Proceeds” section of the prospectuses for the Offerings, we treat our real estate acquisition expenses as funded by proceeds from the offering of our shares. Therefore, for consistency, proceeds from the issuance of common stock for the six months ended June 30, 2011 and 2010, respectively, have been reported as a source of distributions to the extent that acquisition expenses have reduced net cash flows from operating activities.
===========================================

So, if what you say is true, that dividends through June 30 are covered by rent from the properties, why is it clearly stated that the distributions were paid from a combination of cash flow from operating activities, proceeds from the sale of common stock, return of capital, and borrowings?

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