In what has now become more of a norm than an unexpected event in the non-traded REIT world, yet another large non-traded REIT disclosed this week to investors that their initial investment has dropped in value substantially. On August 14, 2012, Florida-based CNL Lifestyle Properties, Inc. announced an adjusted price per-share of $7.31, which represents a decline in value of more than 25 percent from its original price of $10 a share. Since the REIT had raised approximately $3.2 billion by the time it closed its offering to the public, according to CNL’s own valuations the re-price of share value to $7.31 represents a loss to investors of over $870 million dollars.
In a letter addressed to shareholders on August 14, CNL Lifestyle Properties Chairman, James Seneff, and CEO, Stephen Mauldin, indicated that the price per-share decrease was primarily due to the “decline in value of [their] golf and lodging portfolios, and [their] discontinued mezzanine lending program.” But a closer look to a 14-page press release filed with the SEC on the same date reveals additional reasons for the decline in value. Specifically, while the document filed with the SEC does confirm a reduction in rental income of “approximately $2.3 million on 32 golf facilities as a result of the lease modifications as well as lower net operating income in 2012,” the regulatory filing reveals that the decline is also due to: An increase in interest expenses and loan costs amortizations ($1 million); an increase in depreciation expenses ($2.6 million); an increase in bad debt expenses ($0.5 million); and perhaps most concerning, an increase in asset management fees and other general and administrative expenses ($1.9 million) due to the growth in the number of properties.
The increase in asset management fees highlights the fact that CNL related entities continue to generate tremendous profits, while investors see their investment lose considerable value. Like many other non-traded REITs, CNL Lifestyle Properties is advised and managed by its own affiliate. As result, CNL pays advisory fees, management fees, and other administrative expenses to another CNL entity, in this case CNL Lifestyle Advisor. According to the latest annual report, in 2011 CNL Lifestyle Properties paid its advisor approximately $74.1 million in acquisition fees, asset management fees, and other reimbursable expenses. All this while CNL simultaneously reported overall net income losses for three consecutive years (e.g., $69.6 million in losses for 2011 and $21 million in total comprehensive losses for the second quarter of 2012 alone). See CNL’s 2012 Quarterly Report filed with the SEC on August 14, 2012
The share re-price announcement by CNL also impacted the 6.25 percent distribution investors had been receiving in the past. Specifically, investors should expect to receive approximately 4.25 percent distribution based on the investors’ original investment of $10 per share. In this regard, investors should question (like in most other non-traded REITs) where the distributions are exactly coming from. In CNL’s 2011 annual report filed with the SEC, CNL Lifestyle Properties disclosed the following:
“In the past, we have borrowed from affiliates and other persons to make cash distributions, and in the future we may continue to borrow money as we consider necessary or advisable to meet our distribution requirements. Our distributions have exceeded our funds from operations in the past and may do so in the future. In the event that we make distributions in excess of our earnings and profits, such distributions could constitute a return of capital for federal income tax and accounting purposes.”
The annual report also discloses that in 2011 CNL Lifestyle Properties funded $9.8 million in distributions to investors with loans and borrowings.
Unfortunately, this is not the first time Vernon Litigation Group has seen issues with CNL related entities. In 1997 and 1998 attorney Chris Vernon –through FINRA arbitration— successfully recovered losses suffered by older retirees, partly as consequence of their investments in three different CNL products (now non-operational), including the CNL Income & Growth Fund IV, CNL Income & Growth Fund VII, and CNL Properties, Inc. More than a decade ago, Mr. Vernon asserted in arbitration that these types of investments are not suitable for many investors because they can be highly illiquid long-term investments that are far riskier than what some financial advisors suggest while recommending these products.
The Vernon Litigation Group law continues to raise concerns for investors about non-traded REITs. The firm has recently filed more than $6 million in claims before the Financial Industry Regulatory Authority (FINRA) involving non-traded REITs on behalf of investors.