On Advice

Claiming bad oversight, ex-rep urges investors reject REIT offer

Says adviser is lowballing American Spectrum

Jul 25, 2014 @ 12:30 pm

By Bruce Kelly

private reit, american spectrum, valuation,
+ Zoom

A former registered representative who sold $1.6 million of a now-moribund private real estate investment trust is frustrated with the REIT's history of related-party transactions and thinks results could be better if the REIT were managed better.

The ex-rep, Byron Meo, wants investors in the American Spectrum REIT I, which owns self-storage facilities, to contact him after an offer by the REIT's adviser to buy 1.6 million shares — a 64% stake — for $1.25 a share. They originally sold for $10 a share, meaning shareholders are taking an 87.5% loss on their investment.

Claiming to know the REIT's history and properties inside and out, Mr. Meo argues that the REIT is worth more than American Spectrum Advisors is offering.

'TREMENDOUS VALUE'

“There's tremendous value in the REIT that's not being realized,” Mr. Meo said. The adviser is offering to buy it “for cents on the dollar,” he added.

William J. Carden, the president, chairman and chief executive of American Spectrum Realty, the company that manages American Spectrum REIT I, is the only current board member of the REIT. Mr. Carden is also president of the REIT's adviser. He did not return calls.

“The best thing for investors is not to sell the investment,” Mr. Meo said. “We may come out with an offer ourselves at a higher price of $1.60 or $1.65 per share.”

(Related: Regulators have an uphill battle to bring transparency to illiquid investments)

When he was a broker affiliated with Omni Brokerage Inc., which focused on real estate securities and closed in 2011, Mr. Meo sold 160,000 shares of the private REIT to clients. He is also an investor in the REIT, but declined to say how many shares he owns. Mr. Meo worked in the securities industry for 25 years and left in 2010 to pursue private real estate investments. He now is a president of an eponymous real estate investment firm in Pasadena, Calif.

Mr. Meo pointed to three previous transactions that he claims eroded the value of the American Spectrum REIT I as an indication of mismanagement that has harmed the REIT's value.

In 2010, American Spectrum Realty bought a 55% stake and a 38.4% interest in two of the REIT's self-storage properties for $100,000 and 301,000 operating partnership units of American Spectrum Realty, according to filings with the Securities and Exchange Commission. The company valued those units at $1.6 million combined, according to the SEC filings.

WORTH UNKNOWN

Also in 2010, American Spectrum Realty acquired two notes receivable, each with a face amount of $500,000, interests in three apartment complexes, and one student housing facility from American Spectrum REIT I, according to SEC filings. The purchase price of $1.3 million was funded by the issuance of 205,000 operating partnership units.

It is not clear what those operating partnership units are now worth.

“The crown jewels of the REIT's portfolio were sold at the worst time near the market low for practically no cash,” Mr. Meo said. Those transactions between related businesses, known as related party transactions, have frustrated him and his former brokerage clients who still own the REIT, he said.

“Investors saw no benefit” from those transactions, Mr. Meo said. “Real estate investors should have been buying at that time” because of lows in the market, he said.

There are 450 shareholders of the private real estate investment trust, according to an offering letter sent this month.

Questions over the current offer by its adviser and the value of American Spectrum REIT I only add to the private REIT's troubled history. It was formerly dubbed the Evergreen Realty REIT Inc. but changed its name in 2010 after American Spectrum Realty acquired the property management and asset management contracts held by Evergreen Realty Group and affiliates.

James Hurn, general counsel for American Spectrum Realty, did not return phone calls to comment about the REIT's value or whether related party transactions had eroded the REIT's value.

LONG TIME, NO DIVIDEND

Started in 2004 with a $25 million fundraising, the American Spectrum REIT I hasn't paid a dividend since 2009 and hasn't had an annual meeting of shareholders since 2010. The private REIT is small, with just $16.8 million in total assets, mostly comprised of a half-dozen self-storage properties.

Private REITs such as American Spectrum REIT I, which is no longer sold by independent broker-dealers, should not be confused with public, nontraded REITs. Private REITs, which are limited in the number of shareholders they have, offer investors and advisers far less disclosure than public, nontraded REITs.

Private REITs, for example, do not submit filings to the Securities and Exchange Commission and are therefore much more opaque than a public, nontraded REIT.

Along with the American Spectrum REIT I, American Spectrum Realty is also facing troubles. The company, which is publicly listed, has not filed its 2013 annual report with the SEC and stopped trading in April on the New York Stock Exchange. According to SEC filings, American Spectrum Realty has created a plan to regain compliance with the Big Board's listing standards.

“It seems like American Spectrum Realty wants to gobble up (the REIT's) assets for very little money,” Mr. Meo said. “ASR wants to buy us out at cents on a dollar, in contrast to our best interests. ASR's interests are in conflict with the REIT shareholders' best interests.”

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