Wednesday, May 05, 2010

May brings plenty of filings for new BDC's and some oddball REITs

Oodles of S-11's and N-2's have been filed recently; and so this list is not exhaustive.

1. Legacy Healthcare Properties Trust.

Equity healthcare reit started by ex-CNL folks. These folks are veterans of the non-public reit market (scam). Statements in the prospectus such as "In addition, we will grant an aggregate of ????? shares of our common stock to our executive officers upon completion of this offering which, together with the shares they will purchase in the concurrent private placement, will result in ownership by our management team of approximately ?.??% of our outstanding common stock upon the completion of this offering and the concurrent private placement. These shares will be fully vested upon grant." should be viewed with suspicion.

2. Reunion Hospitality trust.

A bizarrely structured offering creating a hotel reit involving a trust account, forced investment period and passive participation shares equal to 5% of the public offering. This will probably not attract much interest , since there are already enough blind pool hotel reties to keep anyone happy (Pebblebrook Hotel Trust, Chatham Lodging Trust, Chesapeake Lodging Trust etc.)

3. Two Harbors's Investment Corp.

Filed a registration statement for various securities underlying warrants left over from the companies days as a SPAC. Two harbors is my personal pick in the RMBS reit space due to management's expertise and enunciated conservative business strategy, and sensible approach to hedging interest rate risk.

However management hurt its credibility by recently canceling a stock offering because it would be excessively dilutive, and then doing an offering of roughly the same size, with only slightly more favorable conditions.

This has highlighted a risk for the externally managed reits with a flat fee management structure. Namely that management is incentivized to raise equity, since that is the only way to increase the earnings of management.

4. Various potentially high cost, externally managed BDC's.

Several of private-to-public BDC conversion's have filed N-2's with the SEC. These filings are mostly the same, but with subtle differences. There is some, inconclusive evidence that folks are becoming aware of what does and doesn't work in the IPO market. For example the N-2 for OFS capital corporation, includes a total return hurdle and non realized PIK interest exclusion in the calculation of the incentive fee; similar to that seen in THL credit (TCRD).

5. Madison Square Capital.

Finally, Paul Ullman deserves an award for persistence, because Madison Square Capital has gone through 12 (count'em !!) S-11/A's since first filing to go public back in April 25 2008. You can sort of chart the wreckage and drama, through the S-11's posted from 2008 to 2010 as the company switches from being internally to externally managed, gains and loses a co-investment commitment from Leucadia National etc. In its current incarnation, Madison Square hopes to be high rolling Agency RMBS Reit like American Capital Agency (AGNC) with big leverage and big dividends. Sort of the opposite approach that Two Harbors is taking.

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