In late August, when Richmond, Va.-based Grubb & Ellis Apartment REIT agreed to take over the assets of Oakton, Va.-based Mission Residential—along with agreements totaling $182 million to acquire nine multifamily properties from affiliates of Mission’s MR Holdings—chairman, CEO, and chief financial officer Jay Olander knew the deal would give his company the jolt that it needed. But ultimately, the deal was just the first move in a series of changes for the unlisted REIT, recently renamed Apartment Trust of America.
On Nov. 1, Santa Ana, Calif.-based Grubb & Ellis Equity Advisors, the primary real estate investment and asset management subsidiary of Grubb & Ellis Co., announced that it was terminating its affiliates' advisory and dealer-manager relationship with Grubb & Ellis Apartment REIT. The Mission deal played a key role in this decision.
“Over the past few months, there has been an increasing divergence in perspective between Grubb & Ellis Equity Advisors, as the advisor, and the REIT's board of directors, which has resulted in fundamental differences of opinion as it relates to strategic direction of the REIT,” said Jeff Hanson, president and CEO of Grubb & Ellis Equity Advisors, in a statement.
Grubb & Ellis Equity Advisors, which wouldn’t comment for this story, didn’t want to be associated with the Mission deal, according to sources. But there were other issues as well. Olander says Grubb & Ellis wasn’t providing the support that he needed to grow his firm. In a three-year period of time, he says Grubb helped him raise less than $180 million. In fact, he says his secondary offering, which started in June 2009 and has a 36-month horizon, raised only $24 million. “My competitors are raising that in half a month,” he says.
Ultimately, that limits Olander’s exit strategies. “We, as a non-traded REIT, have a goal of listing our shares or getting big enough to list our shares or have different liquidity options,” Olander says. “Every non-traded REIT out there is in the same boat. In order to do that, the company needs to grow”
Since Grubb & Ellis’ early November announcement of its split with Grubb & Ellis Apartment REIT, seven investors have sued the firm and a number of different Mission entities for “blatant self dealing” by executing transactions that would “immediately and irrevocably harm a number of investors.”
In the suit, the seven investors accuse the defendants of “selling properties and other interests owned by the Trust at grossly inadequate ‘fire-sale’ prices and at the worst time [when there is no need to sell at all] in order to personally benefit Mission and its affiliates.” Furthermore, it says that Mission refused to respond to its concerns; wouldn’t provide access to books and records; implemented restructuring agreements that were detrimental to investors; and proceeded with transactions objected to by investors and allocated benefits away from investors and to themselves.
Neither Mission managing principal Chris Finlay nor representatives for the seven investors involved in the lawsuit returned calls and e-mails from Multifamily Executive. Olander, however, points out that sellers in a Delaware Statutory Trust don’t have a lot of options when it’s time to sell.
“At the end of the day, there’s a fairly narrow margin of what property values are,” he says. “Given that property values are what they are and given that these guys came [into the deal] for tax purposes, the structure was appealing to allow them to preserve their tax position and to allow them upside over time by continuing owning shares in the REIT.”
Despite the litigation, parts of the deal have closed. In the first week of November, Olander closed on Mission’s management company. That gave the REIT the management of 13,000 apartment units in North Carolina, Georgia, Florida, Tennessee, Texas, and Utah.
At the end of September, Olander had closed on Rock Ridge, a 226-unit property near Dallas that was owned by a limited partnership that put Mission’s MR Holdings in the general partner role. But eight properties owned by Delaware statutory trusts (for which MR Holdings serves as the trustee) still remain in limbo. Olander says the plaintiffs have 90 days from Nov. 10 to do discovery and decide if they want to take their case to trial.
In the meantime, Olander is staying busy. In November, he announced that Grubb & Ellis Apartment REIT was changing its name to Apartment Trust of America. He also announced plans to enter into an advisory agreement with a firm owned by New York-based American Realty Capital and Richmond, Va.-based ROC REIT Advisors (which is run by Olander). Olander also announced a new dealer manager agreement with Realty Capital Securities, American Realty Capital's managing broker dealer.
“Realty Capital Securities is raising between 15 and 20 percent of all of the equity being raised in the non-traded REIT sector,” Olander says. “We looked at a number of alternatives and came to a decision on who we thought was best capable of raising money for us.”
But before he can focus on future growth, Olander admits that he needs to close out the Grubb & Ellis transaction and add the 2,676 apartment units located in North Carolina, Tennessee, and Texas to his portfolio.
“Our biggest push right now is to get the Mission deal closed,” he says. “We have a little under $400 million in assets. The last piece of this transaction is approximately $160 million. In terms of an acquisition, it’s a pretty big for us.”
But Olander’s firm will be stuck in limbo for the foreseeable future unless there’s a solution with those last seven investors.