Steadfast change in CFO – update

This post updates our previous post regarding the resignation of Steadfast’s CFO, James Kasim.  Steadfast subsequently reported that the Audit Committee of its board of directors initiated an investigation in response to announcements related to Mr. Kasim.  According to the report, the Audit Committee engaged an outside law firm and a “large, national independent accounting and auditing firm” to assist in the investigation.  At the direction of the Audit Committee, the procedures of the investigation included conducting interviews, analyzing certain transactions and assessing the related internal controls that were in place during Mr. Kasim’s tenure as CFO.  This investigation was completed on April 7, 2011, and the Audit Committee was advised that nothing was discovered that would adversely impact the integrity of Steadfast’s financial statements.  The Audit Committee discussed the results of the investigation with Ernst & Young LLP whose report on its financial statements for the year ended December 31, 2010 is included in Steadfast’s prospectus supplement No. 8 and Form 10-K.

Empire re-emerges as Independence

Independence Realty Trust, Inc. filed a Form S-11 on April 8 relating to an offering of up to $1 billion of common stock.  Independence’s name was changed from Empire American Realty Trust, Inc. following the acquisition of its advisor and dealer manager by RAIT Financial Trust, a publicly traded REIT (NYSE:RAS), earlier this year.  As you may recall, Empire previously registered an offering that was declared effective in 2010, but never broke escrow.   Martel Day, formerly executive vice president of Inland Securities Corporation, serves as executive vice president of Independence and president of its dealer manager.

Independence’s investment strategy is to acquire a diverse portfolio of multifamily properties located in the United States.  The REIT expects to target primarily core and stabilized multifamily properties that are well leased and produce predictable income, but will also consider properties that require limited capital expenditures, have existing cash flow and offer opportunities for enhanced returns.  It will be seeded with six properties being contributed by affiliates of the sponsor in exchange for operating partnership units and the assumption of debt.

Skin in the game at Grubb & Ellis Healthcare REIT II

Grubb & Ellis Healthcare REIT II, Inc. announced that Jeff Hanson, its Chairman and CEO, and Danny Prosky, its President and COO, have entered into executive stock purchase plans under which they will invest 100% and 50%, respectively, of their cash compensation (which they earn as employees of Grubb & Ellis Co.) in shares of common stock of Grubb & Ellis Healthcare REIT II.  The plan is irrevocable and will remain in effect until the earlier of Grubb & Ellis Healthcare REIT II closing its equity raise or the end of 2011.  The purchase price will be $9.00 per share, which is equal to the $10.00 per share public offering price less commissions and the dealer manager fee.  According the announcement, both Prosky and Hanson intend to renew the plans on an annual basis beginning January 1, 2012.

CNL Lifestyle completes private note placement; indenture places restrictions on dividend payments

On April 6, CNL Lifestyle Properties, Inc. filed a Form 8-K disclosing that it had completed the sale of $400 million of 7.25% senior notes due 2019 resulting in net proceeds of approximately $388 million.    The company indicated that it intended to use the proceeds of the offering to repay existing indebtedness, fund future acquisitions of properties, loans and other permitted investments, and for general corporate purposes.  

The indenture under which the notes were sold, among other things, limits the company’s ability to pay dividends or make certain distributions.  The formula for determining the amount of dividends that can be paid is highly technical and includes a number of defined terms, but generally provides that the amount of dividends, plus certain other “restricted payments,” must be less than the sum of (1) 95% of CNL Lifestyle’s funds from operations for the period from January 1, 2011 to the end of the most recently completed fiscal quarter, (2) aggregate net cash proceeds received from the issuance of additional equity interests, (3) proceeds from sale of any restricted investment made after the date of the Indenture, and (4) the fair market value of certain entities designated as a restricted subsidiary.  However, CNL Lifestyle may pay any distribution necessary to maintain its status as a REIT under the Internal Revenue Code if its aggregate debt on a consolidated basis is less than 60% of its adjusted total assets and no event of default has occurred.

To our knowledge, CNL has not made a public announcement of the anticipated impact of this restriction on its dividend rate, which is currently 6.25% based upon a $10 share price.

FFO, MFFO . . .

A preliminary look at 10-Ks recently filed by non-traded REITs suggests that they are continuing to use a variety of metrics – some simple, some complex – for evaluating historical performance, sustainable performance, and distribution coverage. The Investment Program Association adopted a “Practice Guideline” in late 2010 relating to Modified Funds from Operations, or MFFO, which it characterizes as a “supplemental performance measure.” ( However, according to a memo posted on the IPA’s web site, the SEC staff raised concerns regarding the use of the metric, indicating that while it may not be “per se misleading,” its proper interpretation and limitations should be presented in any public disclosure. Among other things, the SEC staff indicated that it does not believe at this time that the IPA’s version of MFFO is an appropriate measure of historical earnings and that it should not be presented as a ratio of dividend coverage or as a source of cash to pay distributions. In addition, the Pennsylvania Securities Commission has indicated that it will not clear any non-traded REIT offering where an MFFO metric is used in an SEC filing. (

Perhaps due in part to these regulatorySnyder Kearney is a law firm located in Columbia, Maryland near Washington, D.C. that provides due diligence and analysis of Real Estate, Oil and Gas Programs, REIT’s, Commodity Pools, Sponsors, Advisors, and Money Managers, Hedge Funds, Managed Futures, Equipment Leasing Programs, Broker-Dealer Regulatory Services, Corporate Governance and Compliance, Capital Raising, and Corporate Transactions. concerns, non-traded REITs have not overwhelmingly utilized the IPA version of MFFO in their recently filed 10-Ks. Our preliminary survey of 48 10-Ks indicates that 17 REITs are reporting what they identify as IPA MFFO, 15 are reporting some other version of MFFO, 43 are reporting traditional NAREIT FFO, and five do not appear to be reporting any non-GAAP financial measure. Of the 38 that had active primary offerings as of the year end, 14 reported IPA MFFO. Also, it appears some are reporting metrics in supplemental information “furnished” to the SEC in Form 8-K filings that are different than those included in their “filed” documents.

There are a host of issues surrounding the use of MFFO (IPA or otherwise) – Do the measures include too many technical adjustments for investors to understand them (IPA MFFO has up to 10 possible adjustments and we’ve identified a total of 44 different adjustments being used across the industry)? Are certain measures being described as “performance” measures really closer to being cash flow measures? Is it appropriate to include significant information in a “furnished” document (which does not get incorporated into a registration statement or prospectus) during a 1933 Act offering? Are some issuers selectively choosing not to make certain adjustments because they will have a negative effect on their bottom-line MFFO? Are all measures characterized as IPA MFFO making all the IPA-recommended adjustments, and just those adjustments? Stay tuned, we expect to have more reports as we study the recent filings.

Healthcare Trust of America increases shares available under stock plan; signals possible dividend cut

On February 24, 2011, HTA’s board of directors amended and restated the 2006 Incentive Plan (the “Amended Plan”), which permits the grant of incentive awards to employees, officers, directors, and consultants.  The Amended Plan authorizes the granting of awards as options, stock appreciation rights, restricted stock, restricted or deferred stock units, performance awards, dividend equivalents, other stock-based awards, including units of HTA’s operating partnership, and cash-based awards.  Subject to adjustment as provided in the Amended Plan, the aggregate number of shares reserved and available for issuance pursuant to the Amended Plan is 10 million, which includes 8 million new shares added by the amendment and restatement.

According to a recent filing on Form 8-K, HTA indicated that its board of directors may reduce its distribution rate and HTA cannot guarantee the amount of distributions paid in the future, if any, noting that the amount of distributions HTA pays is determined by the board of directors at its discretion, and is dependent on a number of factors, including funds available for the payment of distributions, HTA’s financial condition, capital expenditure requirements and annual distribution requirements needed to maintain HTA’s status as a REIT, as well as any liquidity alternative HTA may pursue in the future.

Dividend Capital Total Realty Trust announces valuation

Dividend Capital Total Realty Trust announced that its board established an estimated value per share of its common stock as of March 11, 2011 of $8.45.  The REIT’s Form 8-K provided a very brief description of how the board determined an estimated value, including the fact that the board relied upon information provided by DCTRT’s advisor and by an undisclosed independent third party investment banking firm, as well as the board’s experience with, and knowledge about, DCTRT’s real estate portfolio and debt obligations. The board considered valuation methodologies including, among others, a discounted cash flow analysis.  In addition, the board reviewed current, historical and projected cap rates for commercial properties similar to the properties owned by DCTRT, and the values of publicly traded REITs with portfolios comparable to DCTRT’s portfolio.  The board also took into account the estimated value of DCTRT’s other assets and liabilities, including an estimate of the value of DCTRT’s debt obligations.  The Form 8-K provided no information about the specific role of the investment banking firm, the assumptions utilized in applying the valuation methodologies (such a discount rates and cap rates), or the ranges of values indicated by the various methodologies utilized.

Inland Western progresses toward listing, announces other developments

On February 14, 2011, Inland Western filed a registration statement with the SEC for a public offering of up to $350.0 million of Class A Common Stock, which is expected to be listed on the New York Stock Exchange.

On February 24, 2011, Inland Western’s shareholders approved an amendment and restatement of Inland Western’s charter that is primarily intended to (i) permit Inland Western to implement a phased-in liquidity program in connection with the listing of existing common stock, and (ii) more closely align Inland Western’s charter to those of its peers with publicly listed securities.  Given that Inland Western is pursuing the initial listing of its existing common stock, it is not planning on publishing an estimated annual statement of value of its common stock as of December 31, 2010.

On March 8, 2011, Inland Western declared distributions for the first quarter of 2011 at an annualized rate of 2.375% based on a purchase price of $10 per share.  The first quarter of 2011 distribution rate is an increase over the 2.25% annualized distribution rate declared by Inland Western for the fourth quarter of 2010.  This marks the sixth consecutive quarterly increase in Inland Western’s distribution rate.

On March 8, 2011, Inland Western’s board increased the number of directors from eight to nine and elected Mr. Steven P. Grimes, who serves as President and CEO, to the board.

Wells REIT II cuts dividend, announces private debt offering

Wells REIT II reduced its quarterly distribution rate from $0.15 per share (6.0% annualized) to $0.125 per share (5.0% annualized yield) beginning with the first quarter of 2011.  Wells REIT II indicated that it believes that reducing the distribution rate will help to bridge the gap between operational cash flows and distributions, strengthen its negotiating position as it competes for leases in a tenant-favored marketplace, and mitigate the impact of economic turbulence on its portfolio.

On March 29, 2011, Wells REIT II announced that it has agreed to sell $250.0 million aggregate principal amount of 5.875% unsecured senior notes due in 2018 at 99.295 percent of their face value in a private offering, which is expected to close on April 4, 2011. The rating agencies have assigned ratings to the notes of BBB- (Standard & Poor’s Ratings Services) and Baa3 (Moody’s Investors Service). The notes will be issued by Wells REIT II’s operating partnership and will be guaranteed by Wells REIT II and certain of its subsidiaries.

CNL Lifestyle developments

On March 16, 2011, Tammie A. Quinlan gave notice that she was resigning as CFO of CNL Lifestyle effective April 9, 2011, which is the completion date of CNL Lifestyle’s current public offering, after which the role of principal financial officer will be assumed by Joseph T. Johnson, CNL Lifestyle’s Senior Vice President and Chief Accounting Officer.

On March 24, 2011, CNL Lifestyle announced the commencement of a private offering of up to $400 million of senior notes maturing in 2019 to qualified institutional buyers pursuant to Rule 144A and outside the United States to non-U.S. persons in reliance on Regulation S.  The notes will be unsecured and guaranteed by certain subsidiaries of CNL Lifestyle.  The net proceeds from the offering will be used to repay existing debt, fund future investment acquisitions, and for general corporate purposes.