Unstructured Finance

Goldman fund haggles with REIT investors over 10-cent printing fee

June 13, 2013

A Goldman fund’s REIT charges investors 10 cents per page for financial statements.

Of all the accusations made by an aggrieved group of REIT investors against Goldman Sachs, perhaps the most surprising is how stingy the bank can be.

A Goldman fund that manages the REIT, formerly known as Equity Inns Inc, requires investors to pay 10 cents per page for print copies of its financial reports. Those reports are not available online, nor are they released publicly — a fact that has led this long-running feud to spill into public view in comment letters to the SEC.

“When I asked for financial reports they said, ‘Can you send a check?,” Art Chandler, an investment advisor at Wedbush Securities, said in an interview. “And I said, I would be glad give you $6 out of the $150,000 in accrued dividends you owe me.”

Another investor, Joseph Sullivan was not allowed to use a personal check or money order. He was required to get a cashier’s check.

Sullivan has been more of a thorn in Goldman’s side. He established 300 trusts, each of which holds some amount of preferred shares in the REIT, now known as W2007 Grace Acquisition. His move could force the REIT to start filing annual 10-K statements to the SEC. As it stands, preferred shareholders who want those statements must not only mail in the 10-cent-per-page fee, but sign a confidentiality agreement.

“By restricting the availability of financial information and preventing the holders of the Securities from communicating financial information about the Securities to third parties, Goldman Sachs has acted to depress investor interest, trading activity and the market value of the Securities,” Sullivan wrote in his comment letter on May 31. “As described above, these actions have taken place at a time that Goldman Sachs was buying the Securities for its own account.”

Letters like Sullivan’s poured in after William Farrar, a Sullivan & Cromwell attorney working for W2007 Grace Acquisition, formally applied for exemption from reporting requirements in an April 4 letter to the SEC. Farrar argued that the REIT only has 280 preferred shareholders if all of Sullivan’s trusts are counted as one holder. He also argues that his client has acted properly and that as a small company with a handful of lightly traded preferred shares, it shouldn’t have to endure the cost and headache of public financial reporting.

The preferred owners are quick to cut holes in this argument. First, they say, W2007 Grace Acquisition can’t possibly be a small company with no employees, as Farrar asserts, since it has $1.6 billion in assets and interests in 130 hotels. They also note that a Goldman affiliate scooped up 35 percent of the outstanding preferred stock from investors who threw in the towel, with the effect of shrinking the shareholder base.

Preferred investors also cry foul on the SEC’s methodology for tallying them up. Because the applicable rule looks at “holders of record” rather than “beneficial owners,” many investors are consolidated into few because their assets are assigned to the brokerage firms where their shares are held. Chandler, for instance, has 40 clients but only 10 are listed as holders because of that definitional quirk.

Technically, Goldman itself does not own W2007 Grace Acquisition or any of the shares; one of its Whitehall real estate funds does. Whitehall Global Real Estate Limited Partnership 2007 bought out Equity Inns’ common stock and assumed debt in a $2.2 billion deal in October 2007. Preferred shareholders were left in a sort of limbo: they were given the right to exchange their holdings into a new preferred stock, which soon stopped paying dividends and lost nearly all of its value as the global financial crisis seized markets the following year.

Goldman itself hasn’t had a great time with its Whitehall funds either. Some made big acquisitions at the top of the real-estate market that in hindsight looked extremely foolish. Its international fund, for instance, dropped to $30 million by 2010 from about $1.8 billion, according to the Financial Times.

But things have turned around for hotel REITs lately, with trusts like Summit Hotel Properties, Host Hotels & Resorts and Ashford Hospitality Trust posting returns of 16 to 81 percent over the past year. As a result, preferred holders of W2007 Grace Acquisition are furious that their shares are trading at just a fraction of their $25 par value and that their dividends have been suspended for the better part of five years, while the Whitehall fund and a separate Goldman loan entity collected fees and exercised an option to acquire 97 percent of the REIT’s assets in exchange for forgiving its debt.

“These monetary payments to GS are very troubling,” Andrew Siegel, managing member of White Bay Capital Management, said in his comment letter. He also noted that “the practical effect of this recapitalization was the issuance of equity of W2007 Grace to Goldman Sachs that would be structurally senior to the Grace Preferred Stock, to bypass public investors.”

A Goldman spokeswoman did not immediately respond to a request for comment on Thursday evening, but told the Wall Street Journal this week that preferred holders should have known about the risks involved with their investment.

The end-game for the preferred holders isn’t entirely clear. Even if they win the SEC battle, they may never get their dividends and exiting their positions would be costly. Some have launched a lawsuit over the deal, which is wending its way through court in Tennessee, but will likely take years to resolve.

As these things tend to go, it may turn out that a big bad bank gets a black eye for beating up the little guy, but was savvy enough not to break any rules.

Comments
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The “sullivan has been more of a thorn in Goldman’s side” is saying a lot in only once sentence. Established 300 trusts, each of which holds some amount of preferred shares in the REIT is a big thing in investing and financial staus. Thanks for sharing a bit of information. http://www.diversifiedinvestmentsllc.com  /

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