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More Trouble for Inland American Real Estate Trust

Mar 2013

Inland American's March 2012 quarterly report revealed that the company was the subject of an ongoing SEC investigation (we wrote about this in our blog post titled "SEC Investigation into Largest Non-Traded REIT May Be A Sign of Things To Come"). Inland American's 2012 annual report further disclosed that several stockholders have sued the company seeking recovery of damages (View the SEC filing). According to the information in Inland American's SEC filings, both the SEC investigation and the stockholder demands question Inland American's high fees, the potential conflicts of interests between the interrelated parties in the company structure, its price transparency, and the timing and amount of distributions paid to investors.

Inland American, the largest non-traded Real Estate Investment Trust (REIT) with 794 commercial properties and $10.7 billion in real estate assets, held its estimated price per share at a constant $10 from inception in 2005 and until late 2010. This was a common practice among non-traded REITs. In fact, most non-traded REITs updated their estimate of the per share value of their common stock only after a regulatory notice from FINRA required them to do so. On its December 2010 annual report Inland American reported its estimated per share value to be $8.03. On December 19, 2012, the company announced that its estimated per share value was $6.93. This estimated per share value, however, is no indication of what an investor can receive if he sells his shares. In fact, the REIT makes no guarantees that its estimate of the per share value is close to the actual market price of the common stock and provides very little information regarding how they arrived at their estimate. In fact, according to the December 2012 Direct Investment Spectrum report, the average trade price of Inland American's common stock in the secondary market was $5.92. The true value of the common stock of Inland American is at the core of the SEC investigation and the stockholder suits.

With real estate prices plummeting since 2006 it is highly unlikely that Inland American's real value per share remained constant until December 2010. It is more likely that Inland American's estimated per share value did not reflect potential property impairments that occurred during the housing crisis.

The problem with Inland American and other real estate investments that do not trade on an exchange is that without the benefit of price discovery arising from active trading, any estimate of the price per share is flawed at best. Perhaps this is the reason why many non-traded REITs have had significant changes in the last few months. Some of them, like American Realty Capital Trust III, have merged successfully with publicly traded REITs (see ARCP). Others have publicly acknowledged that they have experienced difficulty raising additional common stock. TNP Strategic Retail Trust, for example, has withdrawn a proposed follow-on public offering of $900 million in common stock citing market conditions as the cause (View the SEC filing).