One of the largest nontraded real estate investment trusts has been sued by an investor in a potential class action, with the investor alleging negligence and a breach of fiduciary duty by the trust, its executives and members of its board.
Behringer Harvard REIT I, which has $4.4 billion in assets, was sued last Monday in U.S. District Court for the Northern District of Texas by Lillian Hohenstein, an investor who bought 1,275 shares of the trust from 2004 to 2008. The complaint is the first step in forming a class action against the REIT, Behringer Harvard Holdings LLC, Robert Aisner, chief executive and president of the holding company, and other Behringer Harvard executives.
“The lawsuit is without merit and we will contest it vigorously,” said Jason Mattox, COO of Behringer Harvard.
Behringer Harvard is one of more than a half dozen large nontraded REITs that has seen its value decrease significantly in the wake of the real estate collapse. It is currently valued at $4.64 per share, versus the $10 per share price of its three offerings in 2003, 2005 and 2006. However, investors for the most part have refrained from filing class actions against the largest REITs.
That is not the case with Behringer Harvard. The complaint alleges that it has “sought to mask the poor performance of [the REIT] by paying investors back with their own money, while at the same time draining the company of millions of dollars” for Behringer Harvard and its executives.
“Although [its] performance has been abysmal, there has been nothing to stop [management] from diverting whatever little cash flow is available to shareholders to themselves,” according to the complaint.
The complaint alleges that from 2004 to 2001, two related companies, asset manager Behringer Advisors and property manager HPT Management Services LP, have collected, respectfully, $104 million and $77 million in fees. That's a total of $181 million.
These fees “were not negotiated at arm's length,” according to the complaint, which cited Behringer Harvard REIT I as the source of the comment. Over the trust's lifetime, the two sets of fees total 4% of the REIT's current assets.
Mr. Mattox, however, contends that Behringer Harvard has actually lowered its fees since the fund was launched.
"Behringer Advisors has waived in excess of $30 million in asset management fees since the inception of the Behringer Harvard REIT I," Mr. Mattox said.
The complaint also focuses on the REIT's inability to pay for its distribution, or dividends, from “funds from operations,” which is the measure of cash generated by a REIT.
According to the complaint, Behringer Harvard REIT I generated $172 million in “funds from operation” from 2003 to 2011 and paid distributions of $569 million. That creates a shortfall of $397 million.
Behringer Harvard REIT I's “ability to cover its future distributions is equally unlikely,” according to the complaint.
The complaint also alleges that Mr. Aisner and members of the REIT's board made false and misleading statements in recommending that investors reject offers by outside funds looking to buy shares of the REIT for as little as $1.80 per share.