Inland American Real Estate Trust Inc., the largest nontraded REIT with $9.7 billion in assets, has drawn the attention of regulators in California, who have questions about the valuation of the REIT.
The California Department of Business Oversight last month sent Inland American a letter that asked the nontraded real estate investment trust for clarification regarding the offering price of a recent buyback of the REIT's shares.
“Please explain why Inland is selling shares [in its distribution reinvestment plan] for up to $8.03 per share, but is only offering $6.10 to $6.50 per share pursuant to the recent tender offer,” according to the letter, which was written April 14 by Danielle Stoumbos, corporation counsel for the business oversight department.
Launched in 2004, Inland American shares were sold for the most part at $10 a share and eventually raised $8.9 billion, the most ever for a nontraded REIT. It and a handful of large, high-profile REITs were whipsawed in the real estate crash of 2007-08 and suffered declines in their valuations of 30% to 50%.
A spokesman for the Department of Business Oversight, Mark Leyes, said Inland American was not facing an investigation, but that the regulator was looking for clarification on a few points of its operations.
The letter came as part of discussions between Inland and state officials about the REIT's annual application to register securities in California. Inland American told investors who live in California in April that its renewal registration of its shares had not been approved. As a result, California investors are, at least temporarily, unable to reinvest their dividends, or distributions, in additional REIT shares. Instead they are receiving cash distributions.
Dan Lombardo, Inland American's vice president of investor relations, said in an e-mail to InvestmentNews that California's inquiry is the result of a misunderstanding.
Inland American in March offered to buy $350 million in shares at a price between $6.10 and $6.50 per share. According to Inland American's annual report from March, investors this year were able to buy shares through its distribution reinvestment plan at $6.94, paying a penny more last year. In 2012 and 2011, respectively, Inland American investors bought shares through the DRP for, respectively, $7.22 and $8.03.
“Please note that we do not currently sell shares out of our DRP for $8.03, and thus using that amount as a current value when addressing our recent tender is not accurate,” Mr. Lombardo wrote.
“The current sales price for our DRP shares is $6.94 per share, which is the estimated share value we announced on Dec. 27, 2013,” he wrote. “As we announced on May 1, 2014, the purchase price for shares purchased by us pursuant to our tender offer is $6.50. The $8.03 figure was an estimated share price we announced on Sept. 30, 2010, and it has not been in effect since Dec. 27, 2011. It was set forth in the registration statement simply as a basis to calculate the SEC filing fees.”
In the letter from the California Department of Business Oversight, Ms. Stoumbos also asked the REIT about its compensation. “Please explain how the internal adviser/manager is compensated and whether any conflicts of interest exist.”
Inland American has been the focus of an investigation regarding fees by the Securities and Exchange Commission since May 2012. “The SEC is conducting a non-public, formal, fact-finding investigation to determine whether there have been violations of certain provisions of the federal securities laws related to” various fees, the company said in its annual report.
Those fees include “business management fees, property management fees, transactions with affiliates, timing and amount of distributions paid to investors, determination of property impairments, and any decision regarding whether the company might become a self-administered REIT,” according to Inland's annual report.
The REIT in March told shareholders it was becoming a self-managed REIT and not paying what is commonly called an “internalization fee” for the change.
“As of March 13, Inland American is self-managed, meaning all previous business manager employees work directly for the REIT and a significant portion of the property managers employees also work for the REIT,” Mr. Lombardo noted. “As a result of this transaction, the company no longer pays a business management fee.”
Meanwhile, Inland American investors are waiting for the 10-year old REIT to announce some type of liquidity event through a merger or listing. In January, Inland American told investors that it was suspending its share repurchase program, which is separate from distribution reinvestment plan. Halting such a program can be an indication of a pending merger or acquisition, REIT and broker-dealer executives said at the time.
Inland American's listing or merging its shares is important for Inland's broader success as a REIT sponsor.
“The outcome for Inland American and how that is received will be very important to them over the next couple of months,” Kevin Gannon, president and managing director of Robert A. Stanger & Co., said in a February interview with InvestmentNews. Stanger is an investment bank that works with Inland and other REIT sponsors.