Cole's Revaluation of Reit II is a Marketing Ploy

We did not have sex with that Pension Board!
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losemoneynow
Posts: 22
Joined: Tue May 11, 2010 5:29 pm

Cole's Revaluation of Reit II is a Marketing Ploy

Post by losemoneynow » Fri Aug 05, 2011 11:16 am

How best to give a booster shot to flagging fundraising efforts in Reit 3 and anemic fundraising in Cole Corporate Income Trust? How about a revaluation of Cole Reit 2 from $8.05 to $9.35, a whopping 16% increase in just one year :shock: Nevermind that most of these assets were acquired before the crash and are located in tertiary markets with above-market rents. This valuation also ignores the fact that the average remaining lease term of this portfolio is declining which, in the net-lease world, equates to value erosion.

The calculation of this value is opaque and the recent 8K filing provides no data behind the calculation. My guess is that metrics from publicly traded REITs were applied to this portfolio to create this valuation. Using data from the recent 10Q, and depending on whether expense reimbursement revenue is included or excluded from an annualized NOI calculation, the implied cap rate of a $9.35 valuation is anywhere from 6.75% to 7.25%. There has certainly been cap rate compression since the last time this portfolio was valued (June 2010), but a portfolio of mostly net leased assets with above-market rents with 11 years remaining will not trade at these cap rates.

The negative press hammering this industry right now is most likely impacting sales. A little "good news" might be what the doctor ordered to energize advisors who might have soured a bit on selling these programs to their elderly clients. Unfortunately, the valuation for Cole REIT 2 is a stab in the dark and this is validated by all the disclaimers riddled throughout the 8K. I think the secondary market is more accurately assessing value of shares in this REIT. Cole REIT 2 shares are trading around $7.00 in the admittedly lumpy secondary market. As a backcheck, if we use the most recent Moody's CRE data, we see that, nationally, retail property values declined 33% peak to trough. This would take a $10 share to $6.66 at the trough. There has since been a 10% boost off the bottom taking the value to $7.25. Thus the secondary market valuation seems in line with national retail property price trends. Of course we know $10 did not go into real estate, only $8.50 went into the assets (thanks to those wonderful fees paid to the advisors and Cole). Thus the real value of this real estate is much lower than $7.00, but the market will ultimately decide that.

No doubt there will be a mad dash of Cole REIT 2 investors to redeem at this new valuation. However, the redemption program is very restrictive so most investors will have to turn to the secondary market and take some real medicine if they need liquidity. As for the medicinal effects on fundraising efforts for Cole's current offerings? Who knows...these financial advisors have bills to pay and the fees are too rich to ignore. It's shocking that with all the mayhem surrounding Apple REITs and their shady valuation techniques that Cole would ignore the impact this will have on the industry and claim their portfolio has appreciated 16% in one year...utterly laughable :lol:

altavd2
Posts: 2
Joined: Wed Jul 06, 2011 4:31 pm

Re: Cole's Revaluation of Reit II is a Marketing Ploy

Post by altavd2 » Fri Aug 05, 2011 1:09 pm

I have enjoyed reading this blog over the past year or so. I do find some of the contributors both informative and sometimes ridiculous. As a former REIT wholesaler and current planner, I have to ask what is the motivation for some of the negativity going around? How miserable must one's life be to take so much time during the day to comb through filings and rant on a blog? I guess its a sign of the times here in America, everyone has an opinion, but no accountability. But I digress...

On the current topic:

Full disclosure: I have a few clients in Cole 2 and have used other REITs in the past. I think you missed the mark on a few things. First, a lot of Cole's assets were acquired in 2008 and in the first 2 quarters of 2009. Looking at Moody's CPPI, you find that to be buying into a declining market. Now, do I believe that the NAV and the overall portfolio to have gone up 16%? Not necessarily, but property values have increased YTD according to this recent article:

[url]http://online.wsj.com/article/SB10001424052702303982504576428040594616136.html[/url]

Second,regarding redeeming shares, Cole is redeeming each quarter but not the full amount requested. I have had clients that have requested to redeem and Cole is prorating redemptions at about 30% each quarter. My client's are also happy because for the Q2 we only expected to receive the $8.05 but Cole honored the new $9.35 price. Each quarter, clients can keep redeeming their shares until they have redeemed all shares. Of the other closed REITs I've sold in the past, Cole is one of a very few that are even allowing redemptions. So your point about selling shares at $7 in the secondary market when you can get over $9 from Cole seems a little ignorant. Just my .02. Maybe there are better ways for a retail investor to own direct real estate, receive a decent monthly dividend and avoid daily market volatility, but I haven't found it.

But again, what is motivation for the all the venom for REITs? Are you a competitor? Did a REIT raid your piggy bank? Or do you wear a cape and fancy yourself a protector of the people?

[img]http://i810.photobucket.com/albums/zz30/nerd_by_proxy/haters-gonna-hate.jpg[/img]

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

Re: Cole's Revaluation of Reit II is a Marketing Ploy

Post by losemoneynow » Fri Aug 05, 2011 2:01 pm

Altvd,

Glad you love REIT 2 and Cole's redemption policy. As for your ignorant claim, I'm merely stating where investors are exiting via the secondary market and the price they are accepting...nothing ignorant about it, that's where transactions are getting done. Perhaps you should re-read the revised redemption policy...it is limited and cannot accomodate everyone who wants out. Can they wait quarter after quarter and hopefully get out? Yes..but the redemption policy can be suspended anytime so I would not assume that option will always be on the table.

As for when these assets were acquired, most were acquired before the fall crash of 2008. Cap rates were aggressive right up to meltdown late in 2008. Most of these assets have a pre-crash basis which, as I stated, will become apparent if and when Cole tries to do something with this portfolio. They have not internalized the advisor so a public listing is out for now. That leaves merger or portfolio sale which means these assets would be bought based on cap rates reflective of the market. What's the market for net leased assets with and average remaining term of 11 years in tertiary markets with above market rents? Not a number close to $9.35. Doesn't mean the greater fool won't come along and pay a silly number but it would be a stretch.

As for motivation that people have for posting on this site? Perhaps if investors in Apple REITs had been reading the very timely warnings authored on this site they would not be in the predicament they are in now. Good luck to you and your clients, they're going to need it.

altavd2
Posts: 2
Joined: Wed Jul 06, 2011 4:31 pm

Re: Cole's Revaluation of Reit II is a Marketing Ploy

Post by altavd2 » Fri Aug 05, 2011 6:46 pm

Losemoney,

You make some good points. My clients will be fine, I've done a good job diversifying them with no more than 7% of their portfolios allocated to non-listed alternatives and I've explained all the risks and fees. So hopefully that helps you sleep better. But to compare Cole and other REITs to Apple, which was only sold through David Lerner reps, is a little unfair. Don't get me wrong, I think there are some terrible REIT companies out there, but there are a handful that try to do the right thing.

David Lerner and Associates sold a proprietary REIT that didnt have to go thru the normal BD due diligence route and DLA reps put massive amounts of client's portfolios in their REITs. This is why we have limitations for alternatives that are constantly decreasing. If you want to go into the blame game, I don't think you can ignore BDs. These firms require REITs to pay to play and make tons of money off them for even being on the platform. This is typically why you see a lot of small independently owned BDs offer up to 20 different alternative investment sponsors and allow a larger allocation on their platforms. I was on the wholesale side, I've seen it. They make more from these type of offerings than their reps selling billions of other products (VAs, MFs, etc.). So until the regulators come in and examine that issue, its unlikely to change.

I work with a large, nationally recognized BD and I do a lot of due diligence with my investment partners. I can tell you no one is perfect. Although there are some that are head and shoulders above the rest. Again, good points but I disagree on some things'.

BruceM
Posts: 4
Joined: Thu Jan 06, 2011 2:55 pm

Re: Cole's Revaluation of Reit II is a Marketing Ploy

Post by BruceM » Sat Aug 06, 2011 5:53 am

Why do you insist on referring to the commission-paid stock brokers who promote and sell the unlisted REITS (as well as other financial products) as "advisors"?? They are SALES REPS...nothing more. I mean, do you refer to the friendly smiling guy that comes to greet you at your local Ford dealership as your "Transportation Advisor"??

BruceM

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