Cornerstone Core Properties REIT Inc., a non-traded real estate investment trust, has sent a letter to its shareholders bearing some bad news: The REIT’s valuation has plunged from the original issue price of $8.00 per share down to $2.25, a dive of about of 72 percent.
Cornerstone’s Letter to Shareholders
The company reported the revised valuation and a few other matters to shareholders in a March 1 letter from Chairman and CEO Terry Roussel. The letter was attached as an exhibit to an 8K filed with the Securities and Exchange Commission (SEC).
The letter attributed the collapse in per-share value to the global economic downturn that negatively affected the REIT’s small-business tenant base. The company said significant decreases in occupancy resulting from the downturn are expected to reduce future cash flows.
In addition, the letter noted that Cornerstone had to take about $43 million in impairment charges that were recorded in the second and third quarters of 2011.
Cornerstone has also ceased making cash distributions to shareholders and suspended the share redemption plan, according to the letter, although it was not clear when these measures were taken.
According to Investment News
A report in Investment News about Cornerstone’s troubles noted that the sponsor and broker-dealer of the REIT — Pacific Cornerstone Capital Inc. — had some regulatory issues a few years ago and had to cease raising capital.
Cornerstone is a small REIT in a marketplace where the largest entities raise billions, the Investment News report said. Cornerstone raised $172.7 million between 2006 and 2009.
Anthony Chereso, the CEO of FactRight LLC, an alternative investment due-diligence firm, told Investment News that Cornerstone had some tenant issues, and difficulty covering debt and distributions. He also said that Pacific Cornerstone’s only option is to liquidate the REIT.
Cornerstone is not the only non-traded REIT to suffer a dramatic decline in value, according to the Investment News report. Late in 2011, the value of the Behringer Harvard Short-Term Opportunity Fund I LP dropped by 40 cents, from $6.48 per share the previous year. Also, the per-share value of Behringer Harvard Opportunity REIT I Inc. declined to $4.12 at the end of 2011, from $7.66 in 2010.
SEC & FINRA Issue Warnings to Investors
Perhaps with these kinds of events in mind, both the SEC and the Financial Industry Regulatory Authority (FINRA) issued investor bulletins on REITs late last year.
Both regulatory bodies warned investors that they need to understand that shares of non-traded REITs do not trade on national securities exchanges, and for this reason, transparency can be an issue.
Non-traded REITs are also generally illiquid, often for more than five years, and distributions can be paid with borrowed funds, in contrast to the dividends of companies that trade on national exchanges, which usually come entirely from earnings.
Therefore, those who invest in non-traded REITs need to inquire thoroughly into the benefits, risks, features and fees, according to FINRA’s investor alert.
It’s too late for the Cornerstone investors, however. The letter the REIT sent to shareholder detailed the components of the plunge in per-share value. The largest part of the drop came from a decline in real estate values, which accounted for $2.69 of the reduction in the share price. Cash distributions paid to shareholders account for $1.43.
Cornerstone’s Letter to Investors
The most basic problem was that Cornerstone’s property portfolio was only 69 percent occupied at the end of 2011, down from 92 percent occupancy at the end of 2008.
Most of Cornerstone’s real estate acquisitions, made between 2006 and 2008, were multi-tenant, industrial business parks catering to small businesses, the letter said.
When the global recession began in early 2008, commercial real estate values collapsed, leading to declines in both rental rates and overall occupancy rates, the letter said, adding that there is yet to be a recovery among small businesses in the United States.
Despite Chereso’s assertion to Investment News that Pacific Cornerstone must liquidate the Cornerstone REIT, the letter assumes continued operations.
Cornerstone reported selling three properties during the fourth quarter of 2011 for a total of $24.8 million. The sales proceeds were used to pay down about $13.5 million in debt, and for cash reserves, the letter said.
Moreover, the letter reported that Cornerstone amended its loan agreement with Wells Fargo Bank in February, extending the term by two years. By making a principal payment of $7.5 million, the REIT reduced its loan obligations to Wells Fargo from $14.3 million to $6.8 million, and was able to lower the interest rate to 3.5 percent. The letter said this would save about $400,000 in interest expense in 2012.
Overall, Cornerstone said in the letter that it has reduced its debt from $27 million as of the end of September 2011, to about $13.5 million. The company said it may sell more properties to further reduce its debt.
To grow shareholder value again, the letter said the board of directors is considering ditching industrial parks in favor of higher income-producing properties in economic sectors more resistant to recession, such as health care.
The board will also evaluate quarterly whether Cornerstone can resume cash distributions to shareholders as it tries to increase funds from operations, and whether it can reinstate the share redemption plan, the letter said.
Guiliano Law Group
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