Inland REIT ends offering short of goal
By Alby Gallun, April 06, 2009
(Crain’s) — Inland Group Inc.’s well-oiled fundraising machine is taking a break.
On Monday, the Oak Brook-based real estate firm’s largest investment vehicle, Inland American Real Estate Trust Inc., terminates a public offering that has raised $8.2 billion since it began in 2005. The real estate investment trust (REIT) has used the money to amass a portfolio of more than 900 properties, including office buildings, shopping centers, hotels and apartments.
Inland Group also had planned on launching another REIT, Inland Diversified Real Estate Trust Inc., with a $7.5-billion fundraising target. The status of that offering is unclear. An Inland Group spokesman declines to comment.
For many REITs, buying opportunities have dried up as the economy has soured and lenders have pulled back. Continuing to raise money that will just sit in the bank doesn’t make sense for Inland American, which had nearly $1 billion in cash as of Dec. 31.
“Accordingly, we made a determination today that the cash position that we are in is sufficient for the effective execution of our business plan, and that additional capital could have the potential to dilute the overall returns,” Inland American Chairman Robert D. Parks wrote in a recent letter to investors.
Having too much cash may seem like a good problem to have, especially today, when so many real estate investors don’t have enough. But the reality facing Inland American is more complicated. Real estate investors are bracing for a deep and protracted downturn, and Inland American could be especially vulnerable, with two of the shakiest sectors — retail and hotels — accounting for about 75% of its $1.1 billion in revenue last year.
And even though the company had $945 million in cash at the end of 2008, that’s down from $1.4 billion as of Sept. 30. To conserve cash, Inland American cut its dividend by 19% in January.
Related story: Inland American slashes dividend
Moreover, the money from investors has been flowing in much more slowly as of late. Inland American is a so-called unlisted, or non-traded, REIT: It files financial statements with the Securities and Exchange Commission, but its shares don’t trade on a stock exchange. Unlike traded REITs that sell their shares to the public in a single day, unlisted REITs like Inland American sell their shares through ongoing public offerings that can last several years.
Investors’ appetite for Inland American shares has plunged since last July, when the firm was selling about $8.4 million of shares a day on average, according to Securities and Exchange Commission filings. By the end of February, the rate had fallen to $2.5 million a day.
Inland American has still raised more equity than any other unlisted REIT in the country, but the company has fallen about $2 billion short of its goal to raise $10.4 billion by August.
One of the perceived advantages of unlisted REITs is that their shares aren’t vulnerable to the big price swings of REIT shares that trade on a stock exchange.
But the shares are also more difficult to sell. In the past, Inland American shareholders who wanted to exit their investment could sell their shares back to the company at a slight discount. But the REIT suspended its buyback program at the end of March, leaving investors with two choices: to hold onto their shares until buybacks start up again or try to sell them through a broker in the secondary market.
The problem is that in the secondary market, buyers are offering as little as $4 for Inland American shares. Yet until Inland American suspended its buyback program, the company was offering $10 a share. As dividend yields for listed REIT shares have soared into the double digits, buyers are demanding similar yields for non-traded REITs and are cutting their bids accordingly. At $10 a share, Inland American would offer a 5% dividend yield.
“Why would you pay 10 bucks for 5% when you can pay five bucks for 10%,” says Nancy Wilson, owner of Partnership Marketing Co., a California-based broker. “I think that’s the logic these buyers are using.”
So far, however, Ms. Wilson hasn’t executed any trades at $4: Sellers aren’t willing to accept such a steep discount, she says.
Inland American itself has been trying to capitalize on the distress in the real estate market by buying up shares of listed REITs that have been beaten down over the past couple years. But that strategy has yet to pay off: The company took non-cash impairment charges of $262 million last year to account for the decline in the value of its securities portfolio, according to its annual report.
As a result, the company’s funds from operations (FFO) fell to $6.4 million last year, down from $234.2 million in 2007. FFO, which adds such items as depreciation back to net income, is considered a key performance measure for REITs.