Inland American offers limited liquidity event through tender offer

Inland American Real Estate Trust Inc., the largest nontraded real estate investment trust with $9.7 billion in assets, is offering to buy back a small number of shares just a month and a half after the REIT signaled that it may be in line for a merger or a listing of its shares. But the offer may be a disappointment to some. In a letter to investors last Friday, the REIT's management wrote that it was offering to purchase for cash up to $350 million of its shares, or about 6%, at a price not greater than $6.50 nor less than $6.10 a share. The company may increase the number of shares in the offer, called a modified “Dutch auction,” by up to 2 percentage points, which could increase the dollar value of the offer by about $120 million. Launched in 2004, Inland American shares were sold for the most part at $10 a share and eventually raised $8.90 billion, the most ever for a nontraded REIT. Last year, it posted earnings of 27 cents a share versus an 8-cent loss in 2012. At the end of last year, Inland American said that its estimated value was $6.94 a share. “For the Dutch tender offer, the board and management believe this is the best course of action for stockholders that seek to maintain their position in Inland American, while also balancing the need for immediate liquidity for some stockholders who wish to sell some or all their position in the company,” said Thomas McGuinness, president of the REIT. “We will continue seeking opportunities to concentrate our portfolio of assets into student housing, lodging and multitenant retail, which we believe will offer us the ability to capture rent increases and future property appreciation as the economy recovers at a more normalized rate.” The offer commenced last Friday and will close at the end of business April 11. Inland American has been in the spotlight the past few months. In January, it told investors that it was suspending its share repurchase program at the end of last month. Halting a share repurchase program can be an indication of a pending merger or acquisition, REIT and broker-dealer executives said at the time. The REIT also told shareholders last week that it was becoming self-managed for no fee. Many REIT sponsors in the past have imposed the charge — commonly referred to as an internalization fee — when the contract between the REIT and its outside adviser expires, with the REIT then acquiring the outside adviser. That charge, which has drawn criticism because it typically isn't fully disclosed in offering documents, has cost investors in several prominent REITs hundreds of millions of dollars. However, over the past few years, the nontraded REIT industry has moved away from that business model and fee. “Self-management will eliminate the quarterly advisory fee paid by the REIT to its business manager,” according to the letter. “Also, the REIT will not pay an internalization of self-management fee in connection with the acquisition of its business manager and property managers.”