Robert A. Stanger and Co. published a special report heavily criticizing the proposed merger between two affiliated non-traded real estate investment trusts, Moody National REIT I and Moody National REIT II. Yesterday, the Moody REITs filed a response with the SEC stating that Stanger’s “editorial contains numerous important factual errors and omissions.” Links to the Stanger special report, as well as Moody’s rebuttal, can be found at the end of the article.
Moody National REIT I’s $300 million portfolio consists of 14 assets comprised of 12 hotels and two notes receivable. The company’s most recent stated net asset value per share was $10.75, as of December 31, 2015, with shares originally sold for $10.00 each. Moody REIT II’s $113 million portfolio consists of two hotel properties. Shares were originally sold for $25.00 and have a current estimated net asset value of $25.03 each.
The proposed merger, which is still subject to Moody I stockholder approval, would result in Moody REIT II acquiring Moody REIT I. According to the agreement, Moody REIT II would pay consideration of between $10.25 and $11.00 per share of REIT I common stock – depending on the associated transaction costs. Moody REIT I stockholders can either receive shares of Moody REIT II common stock or cash – with a 50 percent limit on the cash option.
In its special report, Stanger said that the current merger structure diminishes the inherent value of Moody I shares “by burdening that value with up to $21.8 million of transaction costs. [Stanger] estimates these transaction costs represent 13.8 percent of the aggregate Moody I equity value.”
Stanger added, “Moody II will be denominating the value of the shares of Moody II at $25.00 per share rather than the pro forma combined net investment amount of approximately $23.00. By our calculation, the aggregate cost and discount related to the fees and possibly overstated stock price ascribed to Moody II in the merger totals about $29.3 million, or about 19 percent of the pre-transaction equity value of Moody I.”
The investment bank also took issue with the fees the Moody REIT advisors are set to receive post-merger – which they believe could top approximately $7.3 million.
Specifically, Moody REIT I will pay its advisor approximately $5.6 million to terminate its advisory contract, which Stanger notes is cancellable sans penalty with a 60-day notice. In addition, the advisor will receive a 1.5 percent acquisition fee of the total cash merger consideration paid to Moody REIT I investors – which Stanger estimates to be in the $1 million range. The Moody I advisor will also receive an incentive fee in excess of $600,000.
In its statement, the Moody REITs noted that Moody REIT I’s advisor could have received higher fees under its advisory agreement, but the fees were reduced during the merger negotiations.
“The [Stanger] editorial makes no mention of the fact that the merger was the product of an intensive, several months-long negotiation between the special committees of the independent directors of Moody I and Moody II in which each special committee was represented by its own counsel and financial advisor,” said Moody. “Included in those negotiations was a negotiation with the Moody I advisor of the fees to which the Moody I advisor would be entitled in connection with the merger, resulting in lower fees than could have been owed under the advisory agreement between Moody I and the Moody I advisor.”
Stanger’s biggest contention with the merger lies in the 8.5 percent shareholder servicing fee that would be paid to financial advisors who recommend that Moody REIT I shareholders reject the liquidity option. Under the current agreement, advisors are set to receive $2.125 per share if their Moody REIT I clients elect to receive shares of Moody REIT II rather than cashing out. Should their clients choose the cash option, the advisor will not receive any compensation. Stanger argued that the recommendation incentive is essentially ‘’paying for ‘Yes’ votes.”
While Stanger questioned whether there was a “sufficiently rigorous evaluation” of strategic alternatives that preceded the merger agreement, Moody noted that during its 45-day “go-shop” period, 99 potential third-party buyers were contacted and given the opportunity to perform due diligence and make a proposal to purchase Moody I or its properties. However, Moody says that no superior proposal was received.
“In more than thirty-five years of experience looking at public, non-listed real estate merger transactions, we have never seen a transaction with such transparent and lucrative incentives for both the sponsor/advisor and the shareholders’ financial advisors,” concluded Stanger.
Moody National REIT I raised roughly $133 million in investor equity prior to closing its offering in February 2015, and Moody National REIT II has raised approximately $92 million in its current offering since breaking escrow in July 2015.
Click here to read Stanger’s special report in its entirety.
Click here to read Moody’s official response filed with the Securities and Exchange Commission.