Slice Them and Dice Them – Own a Slice of 1 Building with this REIT

7/24/2015  10 am

Etre REIT has postponed (we think cancelled would be a better word) their offering of the State Street Boston building which we wrote about below.

The concept of a 1 building REIT might have been a good idea back in 2007 or a time when crazy people bought anything, but given that folks actual would like to make money and maybe aren’t as dumb as the underwriters believe.

Good riddance to this bad offering, although they will be certain to try again (they had another offering fail on a building a couple years ago.

We had mentioned before that the financial community was getting pretty creative in the ways they were slicing and dicing assets to create MLP’s and REIT’s, but the latest new REIT pretty much takes the cake.

With the latest proposed IPO from Etre Financial (the new issue would be Etre REIT Series A-1) you can gain partial beneficial interest ownership in 1 building. Yes you read right—1 building. If Etre succeeds in their quest to sell this deal they would hope to do bunches of buildings this way.

This is the building–just think, that in 1 photo you can survey your REITs entire portfolio.

Yes, Etre REIT LLC is offering the public a 49% stake in the building above–fully leased to State Street Corp in Boston, including the parking garage under the building. The balance of the building stake will be held by the current owner (pension funds).

Etre Financial was formed in 2012 and offers numerous real estate related services including capital market access, advisory services as well as asset management.  Etre also offers complete real estate databases (including on publicly trade REITs) with dramatically deep research.

Etre has been pursuing this single building REIT idea for over 3 years now and 16 months ago attempted to take a building in Washington DC ‘public’, but the deal collasped after the building owner backed out of the deal (even after the SEC filings were complete).

The latest deal has been in the works since at least April, 2015 when the preliminary prospectus for the Boston building was filed with the SEC.

Note that this IPO may not occur–will buyers show up at a price that is acceptable to the sellers? Etre is planning to sell 11,500,000 shares at $15 per share–but the price has not yet been set and won’t be until next week sometime.

Assuming that the IPO will happen we have reviewed some of documents filed with the SEC to try to glean a hint of the viability of this single building REIT.

State Street has a firm contract for the lease of the building and the underground garage which runs until September, 2023 with two 10 year renewal options after the initial lease period ends. Total lease payments by State Street Corp for the office space and garage is approximately $69 million/year. The 2003 built building currently has a mortgage loan of approximately $775 million which is a ‘interest only’ loan at 5.66% which matures in January, 2017. Obviously, the refinancing of this mortgage is a risk factor that a investor needs to consider.

Looking over the pro forma income statement for the year ending 12/31/2014 total revenues were around $71 million which translated into a net loss of $11 million.  The largest expenses being property taxes, interest expense and a non cash $29 million depreciation charge. Assuming these numbers hold true for 2015 there should be FFO (funds from operations) of around $18 million. This would work out to something in the neighborhood of 78 cents/share FFO.  Etre has not published any proposed minimum quarterly dividend on the shares and given the loss on operations they are under no obligation to pay any distribution (REITs must pay 90% of qualifying income–but they will have a loss). If one assumes they pay most of the FFO (funds from operations) to the shareholders the yield would be around 5% at the proposed $15/share offering price. This is way too stingy from our perspective. We are dealing with a single building being sold under a new concept here–this is not another Realty Income (ticker:O) with thousands of buildings and decades of operating history.

Now we hate to be old fuddy duddies, but why the heck would be want to risk capital on a singular building REIT concept for less than say 8-10%?? We understand that if there were hundreds of these singular building REITs in existence one could custom build their own REIT–but there are no others–just this one (assuming the IPO comes to market).

In summary, while we are curious about this concept, we will watch from the sidelines and we would suggest that our readers do the same.  There is no reason to be a quinea pig for a financial company that wants to generate some revenue for themselves at your expense.

The latest amended registration statement is here.  Etre Financials website is here.