Are IGW REIT’s distributions sustainable ? Is this a good investment ?
I would say: NO.
My opinion: If you have an investment: get out as the units are worth far less than $1 because the pricing NAV is not the real market net asset value (NAV). The money paid to you over the last 2-4 years has been a return of capital and has eroded your asset value. Invest $100,000 and get 9% per year for 2 years, and then get 50 cents back (unless you get out now). What a great investment ! My opinion: get out while a buck is a buck.
I have an accounting background, but it is getting a bit rusty in my old age. Let’s look at
- very high fees,
- unsustainable distributions from cash-flow,
- inter company exposure and
- very high interest rates.
Base of analysis and page numbers are here http://www.bcsc.bc.ca/eservices/Inc/ViewDoc.asp?DocNum=V7G3K6IBK7W1M7KEN6Q1J7PDV7K3&s=False
1. The fees are very high:
on page 151: fees of $5.2m in 2009 and over $7.8m in 2010 .. on revenues of about $25m in 2010 and $15m in 2009 (see page 157). Is this a good investment ? Are these fees reasonable ?
2. Unsustainable 9% Distributions
(page 159) shows cash-flow of about $5m, which is around 3% on investor investments of about $167m (page 45). The distribution is sustainable only with asset sales which is happening a lot lately in the IGW REIT.
Page 19 shows that distributions are from re-financing or asset sales to a large degree and not from operations.
Asset sales lowers equity for investors, namely net asset value, yet with League it always goes up, even in a recession ! That is why they use the legally correct term “pricing NAV” which has nothing to do with real world asset values !
Magic ? Deception ? Legal ? A scam ? Or clever accounting ? Or brilliant marketing ?
You decide !
3. Exposure to other LPs / Inter company loans
Exposure to Colwood LP:
Page 152: exchange of a class B units into a note. See here: In January 2010, REIT exchanged its Class B units of Colwood City Centre Limited Partnership for a promissory note. The exchange was recorded at the unit’s fair value on the transaction date; which resulted in REIT recognizing a gain of $7,828,824. The value of the promissory note is $18,432,362 and bears interest at a rate of 10% per annum. An incentive management fee of $1,567,576 was charged on this transaction by League Assets Corp., which is offset against the gain recorded. This fee is recorded in accounts payable at December 31, 2010.
A nice gain for the REIT, and a nice $1.5m fee for League Assets.
See my other post regarding Colwood LP .. with over $56m in unsecured loan outstanding. Using assets of $259m and liabilities (excluding $60m income priority units) of $128M (page 156) I arrive at equity of $131m. Deduct $56m in loans to Colwood LP I arrive at 50-60 cents on the dollar invested.
More meddling / exposure to the condo conversion project in Hamilton (page 151): During 2009 REIT sold Sundel Square, a mixed-use commercial building in Langley, British Columbia, and Wellington Suites and Rosewood Tower, residential apartment buildings in Hamilton, Ontario to IGW Residential Capital Limited Partnership, an entity under common management of League Assets Corp., for total proceeds of $38,407,000. The transactions were settled through the assumption of existing mortgages and establishment of inter-entity loans.
Deduct $10m or more in loans to this LP I arrive at less than 50 cents on the IGW REIT dollar invested.
4. High interest rates on some loans
Item 4.8 Firm Capital Credit Agreement
The Firm Capital Credit Facility of a maximum of $6,234,017.47 was made available on August 30, 2011, under a credit agreement dated August 30, 2011, between Firm Capital as the lender and IGW Public
LP and IGW Public GP (“Firm Capital Credit Facility Borrowers”) as joint and several borrowers. The Firm Capital Credit Facility matures on September 1, 2012, unless extended pursuant to the Firm Capital
Credit Agreement. Interest at the rate of the greater of Prime Rate plus six percent (6%) per annum and twelve percent (12%) per annum is compounded monthly and payable monthly in arrears.
see page 153:
Subsequent to year end, REIT repaid loans payable from an institutional investor of $5,750,000. In order to pay these loans, REIT secured three additional sources of financing. A loan payable of $1,051,000 bearing interest at 11% is secured by units of Partners Real Estate Investment Trust and is due on July 28, 2011. In addition, PSUs of $537,250 were issued, bearing interest at 11% and due on July 28, 2011. A mortgage for $4,000,000, interest only, bearing interest at the greater of 12% per annum and prime plus 6%, secured by first, second and third mortgages on the portfolio, is due in April 2013.