Cole Tries to Sneak One Past Investors

We did not have sex with that Pension Board!
Post Reply
altadv121
Posts: 2
Joined: Tue Jul 05, 2011 8:07 am

Cole Tries to Sneak One Past Investors

Post by altadv121 » Tue Jul 05, 2011 8:17 am

Dear ReitWrecks,

Did you have a chance to read the SEC Filing Cole tried to slip in on Friday afternoon before the long holiday? Man, is it a doozy! This looks like the worst of the worst. Cole is going the direction of David Lerner. Cole Corporate Income bought an office building with 8 years of lease term remaining and no rent increases at an 8.5% cap rate. They paid $33M for this turkey! Then, to make matters worse, they put a $24M mortgage on the property and assumed a $9M loan that Cole created (and probably made a fee on as well). That’s 97% leverage! Their charter limits borrowing to 75%! It looks like they bought it from an affiliate of the advisor, something called Cole OF San Antonio TX, LLC. This, from what I can tell, is a Cole note program that was underwater to begin with. And, for arranging all of this for the investors, Cole got paid $627,000 upfront and will get paid another $328,000 this year!

I’ve been paying close attention to your website and this industry for a long time, and these are the types of egregious, unconscionable transactions that I hate to see but seem to happen time and again with the likes of new companies such as Griffin Capital and Independence Capital, but not from established companies like Cole. From what I understand Cole is sold through some of the best respected advisors in the country (like Lincoln Financial, LPL, ING and Commonwealth). Do these guys approve the products first and Cole pulls a bait and switch later or does everyone know these things will happen going into the deal and just turn their heads the other way? Shouldn’t these firms do a better job looking out for their clients? Can you please look into this and provide some insight?

Thank you.

Concerned

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

Re: Cole Tries to Sneak One Past Investors

Post by bobsmith » Tue Jul 05, 2011 10:38 am

An excellent post, altadv121 - welcome to the Forum.

This is an interesting development on many levels. I had not been following Cole closely, but we now see the next iteration of Cole being born before our eyes: Cole Corporate Income Trust, Inc. (we will christen this one CCIT - so that it rhymes with S%it, which is what it is).

I wonder if this is the entity that is referred to by Cole in the WSJ article from June 29 on David Lerner - the relevant passage is here:

A few real-estate companies are responding to the worries by launching products. Cole Real Estate Investments, which offers traditional nontraded REITs, is preparing to offer an unlisted REIT with much lower fees. In addition, the REIT will hire a third party to prepare daily valuations and keep as much as 20% of assets in cash to cover redemptions, according to Marc Nemer, Cole's chief executive.

Unfortunately for investors, if this is Cole's idea of "much lower fees" then they need a reality check. Just read Page 13 of the inagural 10-Q and you see that it is essentially the same fee structure as always.

With respect to the Medtronic deal for CCIT, it certainly looks dodgy. Was there a third party valuation done? Was this arm's length in any way? Does anyone have any information on the affiliated Cole debt fund that is selling this asset? Anyone know if $19/sq ft is reasonable for this kind of property in San Antonio or not?

Cole always seems to get more benefit of the doubt because they are so "established" and "professional", but I think these guys are just as crooked as Glad Knight/David Lerner and all the rest of the non-traded REIT thieves.
Attachments
CCIT 8-k.pdf
(222.92 KiB) Downloaded 323 times
Cole Corporate Income Trust 10Q.pdf
(441.42 KiB) Downloaded 336 times

kevinshields
Posts: 3
Joined: Fri Mar 05, 2010 12:14 am

Re: Cole Tries to Sneak One Past Investors

Post by kevinshields » Tue Jul 05, 2011 10:48 am

REITWrecks: I am not going to comment on Cole, its fees or acquisition policies, but I do take offense to your calling us out as having engaged in 'egregious and unconscionable' transactions. If you have something specific in mind with which you take issue, let me know and I can respond accordingly. Last I checked, we, as a sponsor, have over $26 million of our own equity invested in our REIT offering, which, in my estimation, puts our interests clearly aligned with those of our investors - in somewhat unprecedented fashion.

Whereas I appreciate your 'policing' this industry from your armchair, I would really appreciate your articulating specific facts to which I can respond as opposed to blanket inflammatory statements with no substance.

Thanks.

Kevin A. Shields
President
Griffin Capital Net Lease REIT, Inc.

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

Re: Cole Tries to Sneak One Past Investors

Post by bobsmith » Tue Jul 05, 2011 1:24 pm

Kevin:

It was not ReitWrecks (the moderator) that made the original post in this thread - that was altadv121, who is a new poster on this site. He was the one who made the comment about your firm.

If you guys are putting your money at risk in your structure pari passu with investors then that is a good thing and something the industry needs more of.

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

Re: Cole Tries to Sneak One Past Investors

Post by losemoneynow » Wed Jul 06, 2011 7:45 am

Altadv121 and other posters,

Let me explain what Cole is doing with the Corporate Income Reit. Cole floated note deals to investors years ago as a staging ground to acquire properties for its reits. These are interest bearing notes at high single digit interest rates. In the case of the Medtronic building, the idea is to acquire the property in the note program and contribute the transaction at the same basis to the Corp. Income REIT as it raises capital to clear the note. Cole will only charge a finance fee when permanent financing is placed on the asset.

As to the blurb in the WSJ about new programs offering lower fees, this one is the laugher. Cole's new REITs with the supposedly lower fees will be marketed primarily to Registered Investment Advisors. The distinction here is that its current programs are marketed to financial advisors, not RIAs. The difference is that RIAs have fiduciary liability which is serious stuff. RIAs that produce poor investment outcomes can be sued by investors for fiduciary breach, financial advisors cannot. RIAs, unless they are completely incompetent, will not recommend these programs to their investors given all the warts. This has been tried in the past and failed. One would expect that an RIA would perform heavy due diligence, and in this case, would note that Cole has not taken any REIT full cycle.

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

Re: Cole Tries to Sneak One Past Investors

Post by bobsmith » Wed Jul 06, 2011 8:44 am

That is great info losemoneynow. So I guess the plan will be for them to use the first $9m of equity raised in this new program to clear the remaining Series C sub-debt. So what looks like 97% leverage actually is more like 65%, assuming of course that the purchase price is a reasonable one. So this is not really that big an issue, just structurally how they seed new REITs like this.

The bigger issue is their new "low fee" strategy and desire to market to the RIA community. As an RIA, I can't imagine how this will be successful. Anyone with a fiduciary duty to their client would have to be very ignorant to recommend this kind of investment. Even if the up-front commissions are waived, the other fees and inherent conflicts of interest are enough to put you off. Not to mention your point that Cole and others like them don't exactly have a great track record of success. Good luck to them. :lol:

Rational Realist
Posts: 6
Joined: Wed Jun 02, 2010 10:36 pm

Re: Cole Tries to Sneak One Past Investors

Post by Rational Realist » Thu Jul 07, 2011 11:05 am

I get the final debt ratio at 55%, as part of the third party loan contains a mezz piece that after repayment puts final loan amount at $18 mill or ~55%.

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

Re: Cole Tries to Sneak One Past Investors

Post by bobsmith » Thu Jul 07, 2011 3:26 pm

True - I was (probably incorrectly) counting the mezz piece in the overall leverage. Senior debt leverage is indeed 55% taking out the $5m in mezz.

altadv121
Posts: 2
Joined: Tue Jul 05, 2011 8:07 am

Re: Cole Tries to Sneak One Past Investors

Post by altadv121 » Thu Jul 07, 2011 7:24 pm

Losemoney and Rational,
You’re missing the point completely and are contributing to the “kid-glove” treatment this site and others continue to give this
company. I agree with Bob that Cole seems to always get the benefit of the doubt. Especially you, Rational, as a due diligence officer (according to your website), should at least start everyone on equal footing. Sometimes it seems like an “emperor’s new clothes” situation where no one wants to be the first admit that the emperor is naked.

First, you should all be outraged that this affiliated transaction occurred. You’re failing to ask the first question that any intelligent investor should always ask: Why? Why would Cole buy an asset from one of its entities to “seed” this REIT? Cole, as big as it is, couldn’t find a suitable asset to acquire that wasn’t one of their own? In the entire universe of commercial real estate, nothing would work? Affiliated transactions are fundamentally flawed. You can’t assure that both the buyer and the seller are ahead on the transaction, it’s impossible because someone has to pay the advisor for arranging the transaction and one of us has to pay the closing costs. Someone always loses and the house is the only one that wins.

Second, the leverage is NOT 55%. Stop saying that it is. Maybe, someday, if the fund raises enough money and if the unsecured loan is paid off and after the one year lockout, the mezzanine is paid off, and the Dow goes up and the S&P goes sideways and real estate recovers, then maybe the leverage will be 55%. But it’s not currently, and it’s a fantasy to say that it is when there is mortgage, mezz debt and preferred on the property. If the deal was so great and they really wanted to get this new fund “seeded” properly, why didn’t the advisor waive (as in, forgo forever, not just defer) the acquisition fee? Surely a company the size of Cole doesn’t need the 2% acqusition fee to keep operating. In fact, why didn’t they commit to forgo their asset management fee until the fund was generating enough cash to cover their distribution? And, while we’re at it, if you’re buying 97% leveraged industrial properties, don’t you think the risk profile commands a greater return than 6.5%? It does, but there’s no money to pay a higher distribution (probably not enough money to pay the meager 6.5% distribution) when the mezz loan costs 10% per year and you’ve got to pay the advisor 1% of the purchase price EVERY YEAR. Sooner or later the math catches up with you.

My question was and remains a simple one: Why? Why not acquire a good asset without all of the distraction of an affiliated transaction? Why not waive fees? Why not wait to acquire a new asset when there is sufficient cash? Why not put equity in alongside investors if they really believe in the deal? Why is this company taking this industry backward? It doesn’t have to be this way. Maybe I’m the only one who cares, but why would you do this to yourself weeks after David Lerner got in trouble with the SEC and FINRA? It just doesn’t make sense.

Rational Realist
Posts: 6
Joined: Wed Jun 02, 2010 10:36 pm

Re: Cole Tries to Sneak One Past Investors

Post by Rational Realist » Fri Jul 08, 2011 2:39 pm

Altadv121, WTF, why the personal attack, and who is treating Cole with kid gloves? I just corrected the leverage, making the assumptions that all acquisition debt would be repaid. You have to look at the final leverage, while understanding the acq financing, and then monitor the REIT to make sure the acq debt gets repaid timely. Yes, this Cole REIT's current acq. is highly leveraged, but non-traded REITs did not invent mezz debt and are not the only firms that using mezzanine debt. Many non-traded REITs have lines of credit, which function as a source of acq. financing. Is this wrong, too? Would it have been better if Cole had waited to purchase the property until it raised the equity? Yes. But Cole is not alone in buying properties before it has the equity. I would like to see non-traded REITs stop buying properties without equity, and stop paying distributions from sources other than operating cash flow. I wish I knew the non-regulatory catalyst that make this happen. You touch on an important point in your last paragraph when you mention David Lerner. Its situation is going to taint all non-traded REITs, even though it was sold through one firm. The industry reaction has been slow to non-existent. Painting David Lerner and the Apple REITs as a one-off series of REITS is not a solution. It's time for the non-traded REIT industry to stop its internecine warfare.

Post Reply