Cornerstone Core Properties REIT Value Drops Over 70%

On March 1, 2012, Terry Roussel, Chairman and CEO of Cornerstone Core Properties REIT sent a letter to shareholders informing them that shares of Cornerstone, previously valued at $8 , are now worth just $2.25.  If you would like to read the letter follow this link and click on the SEC 8K filing dated 3/1/2012.

At $2.25, this calculates to a drop in value of about 72%. That is if you can sell the shares at all. Since this is a non-traded REIT, there is no conventional market where investors who need cash can liquidate their shares. The only option presently available are the various secondary market makers, which I have previously written about here and here.

Previously, secondary market makers have advised that non-traded REITs typically sell for 70-80% of the then current estimated value. Assuming that is the case with Cornerstone, then it will currently sell in the range of $1.57-$1.80, which is no doubt a surprise and a disappointment to investors who until just recently believed their shares were worth $8.

Mr. Roussel’s letter goes on to explain that Cornerstone sold three properties in the final quarter of 2011. Proceeds were used to pay down debt and build cash reserves. Debt has been reduced substantially and the company anticipates selling more properties to eliminate debt further. Occupancy, critically important to real estate leasing projects, is down to 69% from 92% at the end of 2008.

A table included in the letter summarizes the “primary components of the decline in per share value”, as follows:

Original issue price                                 8.00
Commissions paid                                   (.80)
Organizational/offering costs                  (.24)
Cash distributions to shareholders         (1.43)
Share Redemptions                                  (.59)
Decline in value of real estate                (2.69)
Revised value                                            2.25

This means 13% of the decline went to pay commissions and offering costs. Most investors will probably be surprised to know that the distributions (1.43) they received, prior to being curtailed, reduced the value of the investment by a corresponding amount.

Many investors were sold REITs like Cornerstone Core with the promise of steady distributions of income, vs. a distribution of capital, and a promise that the value of the investment would remain constant, or increase.

Rex Securities Law , with offices in Boca Raton, FL,  and  Austin, TX,   provides representation to  investors  nationwide who are seeking recovery of investment losses due to the negligence or fraud of stockbrokers and broker dealers. If you have questions about how your account has been handled, call to speak with an experienced securities attorney.

Most cases handled on a contingent fee basis meaning that you do not pay legal fees unless we are successful.

Nationwide Representation

Rex Securities Law

TollFree: 877-224-3199

Florida-561 391 1900 

Texas-512-329-2870

Rex Securities Law Investigates Robin Bruce Davidson, former LPL Financial/Western International Securities Broker

We are in the process of filing an arbitration action with the
Financial Industry Regulatory Authority (FINRA) on behalf of a retired individual who was sold unsuitable investments, including non-traded REITs, by Robin B. Davidson   . Davidson, who formerly worked for LPL Financial and Western International Securities, Inc., was suspended by FINRA for 16 months and fined $10,000. The FINRA allegations leading to the consent which Davidson agreed to included:

  • Davidsonparticipated in private securities transactions involving a managedforeign currency exchange which resulted in losses to dients in excessof $2 million dollars
  • Davidson forged a customer’s name to account related documents

Davidsons CRD indicates numerous customer complaints for unsuitable investments and payouts on settlements exceed $1 million.

Rex Securities Law , with offices in Boca Raton, FL,  and  Austin, TX,   provides representation to  investors  nationwide who are seeking recovery of investment losses due to the negligence or fraud of stockbrokers and broker dealers. If you have questions about how your account has been handled, call to speak with an experienced securities attorney.

Most cases handled on a contingent fee basis meaning that you do not pay legal fees unless we are successful.

Nationwide Representation

Rex Securities Law

TollFree: 877-224-3199

Florida-561 391 1900 

Texas-512-329-2870

Non-Traded REITs: What’s the Problem?

According to a recent April 2012 article in Forbes magazine, REITs have become mainstream investment alternatives due to the requirement that they distribute at least 90% of their income annually to shareholders.

There is a distinction, however that many investors are not aware of between publicly-listed REITs, which comprise the majority of the REIT  trade  and the smaller group of publicly sold, but non-traded REITs.  According to the article, publicly traded REITs have around $478 billion in market capitalization (12/31/2012) and there are 126 publicly listed companies.

The non-traded REIT segment of the market consists of 35 companies that manage about 69 different products. It has a market capitalization of about $84 billion and it is anticipated  to raise around $9 billion in 2012 compared to $8.2 billion raised in 2011.

Forbes points out that unlike publicly listed REITs, non-traded REITs are products that are more often “sold” than they are “bought” by investors. This is due to the fact that non-traded REITs pay very generous commissions ,ranging from 7-10%, putting these products at the top of the list of the selling broker, who cares more about his personal finances than those of his oftentimes unsuspecting and unsuspecting customer.

The broker is able to sell non-traded REITs by ignoring or minimizing the bad aspects of the investment (like large front end charges, conflicts of interest, illiquidity, high overhead, lack of ability to value and inability to maintain distributions).

According to Blue Vault Partners the non-traded REIT market is controlled by five companies who have about  70% of the market, including the following (amounts in billions):

Inland Securities Corp                                   $18.1
W.P. Carey & Co. LLC                                 $9.3
Cole Capital Advisors                                    $8.7
KBS                                                               $7.0
Wells Real Estate Funds                                $6.4
Behringer Harvard                                         $6.2
Apple Companies (David Lerner)                  $4.8
Hines                                                               $4.2

Only recently did regulators require the non-traded REIT companies to provide estimated valuations of the shares. Prior to this, monthly statements reported values at the original purchase price. As a result many investors have only recently learned that their investment may be worth only a fraction of what they paid. This is insult after injury, since many non-traded REITs ceased making distributions some time ago.

Compare the purchase price of $10 to the recent estimated value of these non-traded REITs:

Behringer Harvard Opportunity 1                             $4.12
Behringer Harvard REIT 1                                        $4.64
Behringer Harvard Short-Term Opp                            $.40
Inland Western Retail Real Estate                             $6.95
KBS Real Estate                                                        $5.16

These estimated values understate the loss to the investor since the only market is the secondary market, which yields only about 70% or so of the estimated value upon sale. See my prior post on that topic. Inland Western has reverse merged and gone public as Western Retail Real Estate, more on that in this prior  blog post.

Rex Securities Law , with offices in Boca Raton, FL,  and  Austin, TX,   provides representation to  investors  nationwide who are seeking recovery of investment losses due to the negligence or fraud of stockbrokers and broker dealers. If you have questions about how your account has been handled, call to speak with an experienced securities attorney.

Most cases handled on a contingent fee basis meaning that you do not pay legal fees unless we are successful.

Nationwide Representation

Rex Securities Law

TollFree: 877-224-3199

Florida-561 391 1900 

Texas-512-329-2870

Did Your Broker Suggest Naked Puts? Uncovered Puts?

If your broker suggested that you sell put options (also called an ‘uncovered put’) and you lost money, you may have a claim that the strategy was not suitable for you, depending upon your level of financial sophistication.

The seller of an uncovered put (you for example) collects a premium from the buyer and is contractually bound to purchase the underlying stock at a specified price for a given period of time, generally 90 days or so. If the price of the stock goes up or remains unchanged, then the option will not  be exercised (ie: the person who paid you the premium will not force you to buy the stock) and you will have benefited to the extent of the premium you collected.

This all works very well in a bull market, but what about a bear market, or if the particular stock on which you sold the put option falls dramatically? Your losses can be enormous, a fact often misunderstood by unsophisticated investors or overlooked in the explanation from broker.

Here is an example from a recent case involving the sale of put options on S&P 500 Index.

In early August of 2008, at a time when the financial markets did not look particularly stable, Mr. Smith (name used for this example) sold 10 put options on the  Nov 1075 S&P index. On the day of the sale the S&P 500 index was about 1300. Mr. Smith collected $7 per share for a total of $7,000 (each option is for 10 shares). For the $7,000 paid by the buyer, Mr. Smith was obligated to buy 1,000 shares at a price of $1075 at any time up to the expiration date of the options (third friday in November 2008).

Since, at the time of the sale, the index was 125 points above the exercise price of 1075, one might think this was a nice way to make an easy profit. That is not the case. The index dropped and rebounded over the rest of August and early September and in late September fell below 1075. Ultimately the position was closed out when the index was 899, at a price of $166 per share.

Net result was a loss of $159,000 on this transaction that lasted just 60 days. The total upside of this transaction was the $7,000 premium collected on the sale of the option.

We have consulted with a number of clients who were encouraged by their brokers to write uncovered puts who were never made aware of the huge potential downside risk associated with such a strategy. If you experienced losses on an option strategy suggested by your broker that you did not fully understand, you may have legal rights that could result in the recovery of losses.

Rex Securities Law , with offices in Boca Raton, FL,  and  Austin, TX,   provides representation to  investors  nationwide who are seeking recovery of investment losses due to the negligence or fraud of stockbrokers and broker dealers. If you have questions about how your account has been handled, call to speak with an experienced securities attorney.

Most cases handled on a contingent fee basis meaning that you do not pay legal fees unless we are successful.

Nationwide Representation

Rex Securities Law

TollFree: 877-224-3199

Florida-561 391 1900 

Texas-512-329-2870

 

Despite Prior Problems Non-Traded REITs Are Hot Products

According to a recent report from Robert A. Stanger & Company the first quarter of 2012 saw a stampede of investors to non-traded REITs and other direct participation investments, including Business Development Companies (BDCs) and Direct Participation Programs (DPPs) which include limited partnerships, general partnerships and limited liability companies. Investors poured approximately $3.3 billion in REITs, BDCs and DPPs during the first three months of the year.

Stanger’s report reveals that $2.6 billion was invested in non-traded REITs  and the balance in various BDCs.

The top fund raisers were:

  • Cole Real Estate                                     $805 million
  • Franklin Square Capital                           $541 million
  • American Realty Capital Advisors           $330 million
  • Dividend Capital                                     $242 million
  • W.P. Carey                                             $188 million
  • CBRE Advisors                                      $172 million

This is somewhat suprising given the recent history of many of the non-traded REITs, sold to many with the promise of steady and dependable distributions and a stable market value. In reality many of the non-traded REITs have discontinued distributions, or worse yet funded them with a return of capital or debt financed distributions. Of each dollar invested in a REIT, as much as $.14 goes to pay various costs and fees, leaving only $.86 available for investment. Since they are not traded on any regular exchange, investors have no way to liquidate them if they need cash.

Here is a chart from a prior post in which we highlighted some of the worst performers. Since its publication, Inland Western Retail Real Estate Trust did a reverse merger and went public as Retail Properties of America (RPAI) and the loss to the investor is greater than indicated in the chart.

Name   Offering price, per share    Current estimated value   % decline per share  
Behringer Harvard Opportunity REIT I $10.00 $4.12 -58.80%
Behringer Harvard REIT I $10.00 $4.64 -53.60%
Behringer Harvard Short-Term Opportunity Fund $10.00 $0.40 -96%
Cornerstone Core Properties REIT $8.00 $2.25 -71.88%
Inland Western Retail Real Estate Trust Inc. $10.00 $6.95 -30.50%(see note above)
KBS Real Estate Investment Trust Inc. $10.00 $5.16 -48.40%

 

If you have losses on REIT investments or other stock market losses, you may be able to recover some or all of the losses through FINRA arbitration.

Rex Securities Law , with offices in Boca Raton, FL,  and  Austin, TX,   provides representation to  investors  nationwide who are seeking recovery of investment losses due to the negligence or fraud of stockbrokers and broker dealers. If you have questions about how your account has been handled, call to speak with an experienced securities attorney.

Most cases handled on a contingent fee basis meaning that you do not pay legal fees unless we are successful.

Nationwide Representation

Rex Securities Law

TollFree: 877-224-3199

Florida-561 391 1900 

Texas-512-329-2870

FINRA Issues April 2012 Disciplinary Actions

The Financial Industry Regulatory Authority (FINRA) issues a report on disciplinary and other actions involving registered brokers, investment advisers and brokerage firms every month. Follow this link to the FINRA website for the entire report for the month of April 2012 as well as earlier time periods.

Here are the Florida related actions for April 2012.

William Edward Herlihy (CRD #4005879, Registered Principal, Deltona, Florida) submitted a Letter of Acceptance, Waiver and Consent in which he was fined $50,000 and suspended from association with any FINRA member in any capacity for six months. Herlihy consented to the entry of findings that he effected the sales of stock that was not registered with the SEC, and no exemption from registration applied. The findings stated that the transactions generated proceeds of approximately $386,000 for the customers.

James Calvin Wylie Jr. (CRD #834405, Registered Representative, Ponte Vedra Beach, Florida) submitted a Letter of Acceptance, Waiver and Consent in which he was fined $5,000 and suspended from association with any FINRA member in any capacity for one month. Without admitting or denying the findings, Wylie consented to the described sanctions and to the entry of findings that he engaged in unapproved outside business activities when he provided consulting and analytical services on potential business transactions, outside the scope of his relationship with his member firm and without providing prompt written notice to his firm. The findings stated that Wylie inaccurately
certified on an annual outside business activities questionnaire that he was not involved in any outside business activities.

Glenn Loren Halpryn (CRD #1633028, Registered Principal, Aventura, Florida) submitted a Letter of Acceptance, Waiver and Consent in which he was censured and fined $10,000. Without admitting or denying the findings, Halpryn consented to the described sanctions and to the entry of findings that he caused funds raised from a private placement offering to be used for due diligence on an unrelated prospective business venture. Although Halpryn later repaid the funds to the company, he caused them to be used in a manner inconsistent with the terms of the offering.

Clyde Marshall Thornburg (CRD #1065161, Registered Principal, Palmetto, Florida) was named as a respondent in a FINRA complaint alleging that he engaged in a pattern of
recommending and executing, short-term trading and switching of Unit Investment Trusts (UITs), corporate debt, and mutual funds in customer accounts without having
reasonable grounds for believing that such recommendations were suitable in view of the size and frequency of the recommended transactions, and in light of each customer’s
investment objectives, circumstances, financial situations and needs. Thornburg’s clients had losses of $983,000 while he earned commissions of over $300,000, while misleading clients into believing they were not paying any charges. He also exercised discretion in accounts where the customer had not granted such authority to trade. In addition, he supplied false information about customer’s income, liquid net worth, risk tolerance and investment objectives forged client names on documents.

According to FINRA records, since 2005, Thornburg has worked for the following FINRA firms:

  • SII Investments, Inc
  • Next Financial Group, Inc.
  • Woodbury Financial Services, Inc.
  • International Financial Solutions, Inc.

If you had accounts with any of the brokers recently disciplined, you may be able to recover some of  all of those losses.

Rex Securities Law , with offices in Boca Raton, FL,  and  Austin, TX,   provides representation to  investors  nationwide who are seeking recovery of investment losses due to the negligence or fraud of stockbrokers and broker dealers. If you have questions about how your account has been handled, call to speak with an experienced securities attorney.

Most cases handled on a contingent fee basis meaning that you do not pay legal fees unless we are successful.

Nationwide Representation

Rex Securities Law

TollFree: 877-224-3199

Florida-561 391 1900 

Texas-512-329-2870

Want to Sell Your Non-Traded REIT?

April 12, 2012

With many of the non-traded REITs ceasing their buy-back programs, dropping in value and no longer making the promised monthly/quarterly distributions, investors who need to liquidate these investments have only the secondary market makers as an option. Non-traded REITs do not trade on any conventional exchange and will only become liquid if the REIT sells out or through reorganization becomes registered and publicly traded.

This recently happened when Inland Western Retail Real Estate, via reverse merger, became Retail Properties of America and is publicly traded. See here for more on Inland Western.

I did a bit of online research today and came up with the following companies who represent themselves as companies who can provide liquidity for non-traded reits and other illiquid securities. Note that I have no experience with any of them and suggest you do some due diligence before entering into any business dealings.

If you own non-traded REITs that have dropped in value, you may be able to recover some or all of your losses through FINRA arbitration.

Rex Securities Law , with offices in Boca Raton, FL,  and  Austin, TX,   provides representation to  investors  nationwide who are seeking recovery of investment losses due to the negligence or fraud of stockbrokers and broker dealers. If you have questions about how your account has been handled, call to speak with an experienced securities attorney.

Most cases handled on a contingent fee basis meaning that you do not pay legal fees unless we are successful.

Nationwide Representation

Rex Securities Law

TollFree: 877-224-3199

Florida-561 391 1900 

Texas-512-329-2870