10K Season - Wells

Financial reviews continue.  I have run a basic financial statement analysis on the most recent Wells offerings – Wells REIT II, Wells Timberland REIT, Wells Hid-Horizon Value-Added REIT, and Wells Core Office Income REIT.

In  Thousands	Wells REIT II	Wells Mid-Horizon Value-Added	Wells Timberland	Wells Core Office Income
Total Assets	$5,371,685	$63,242	$360,491	$35,421
Total Liabilities	$1,754,452	$20,974	$199,931	$18,877
Equity Raised	$3,455,697	$51,854	$240,000	$20,548
Net Real Estate	$4,230,039	$50,178	$340,504	$27,994
Direct Debt	$886,939	$19,000	$168,841	$17,275
Leverage Ratio	21.0%	37.9%	49.2%	61.7%
Revenue	$567,967	$5,570	$47,582	$755
Net Income	$23,266	$3,420	($19,518)	($1,544)
FFO	$243,176	($16)	($5,180)	($1,203)
Mod Cash Flow[1]	$254,116	($16)	($1,471)	($534)
Dividends	$300,719	$0	$0	$127
Yield ($10 share, $1,000 unit WMHVA, $25 share Core Office)	5.7%	0.0%	0.0%	1.0%

Wells Real Estate Trust II closed its offering in June 2010.  At December 31, 2010, the REIT had $5.4 billion of assets including $4.2 billion of real estate owned directly.  Wells REIT II realized $568 million total revenue and a $23 million net income.  The shareholder 5.7% dividend is 80% covered by Funds from Operations and 85% by Modified Cash Flow.  The company realized a $161,000 loss on the sale of New Manchester One during 2010.  The REIT appears to be managing its cash flow prudently, covering distributions at a 90% rate.  Property operations in 2010 capitalized at a 7.5% rate suggest net real estate value of $5.9 billion, approximately 40% higher than the book value of the real estate.  Such a value would be consistent with a value of about $9.50 per share, very close to the DRIP price.

Wells Mid-Horizon Value-Added Fund, LLC, opened its initial offering in September 2005 and closed it September 2008.  At December 31, 2010, Timberland had $63.2 million of assets including $50.2 million of real estate owned directly.  Wells Value-Added Fund realized $5.57 million total revenue and $3.4 million net income after recognizing a $6.7 million gain on the disposition of the Park Lane Building in Pittsburgh, PA.  The REIT’s book value per share was $812.85 as of December 31, 2010, which reflects a decline from the original $1000 offering price per unit equal to the offerings costs and deprecation recognized on the real estate holdings.  The REIT originally had an objective of liquidation of the portfolio within eight years of the start of the offering of units.  This would suggest a termination in 2013.  However, the 10-K appears to be preparing investors for an extended holding period: “(W)e do acknowledge that the current economic conditions and their impact on office market conditions may require that we hold individual assets longer than originally projected in order to achieve the best disposition pricing for our investor members.”

Wells Timberland REIT opened its initial offering in August 2006 and its follow on offering ion August 2009.  At December 31, 2010, Timberland had $360 million of assets including $341 million of timberland owned directly.  Wells Timberland realized $47.6 million total revenue and a $19.5 million net loss after provision for $3.7 million of preferred dividends, which were deferred.  Shareholders currently receive no distributions.  The REIT’s book value per share was $4.16 as of December 31, 2010, which represents a significant dilution from the $10 offering price.  As of the publication of the REIT’s 10-K, the share offering is scheduled to close August 6, 2011.

Wells Core Office income REIT opened its offering in June 2010 and is raising funds at a reasonable pace.  At December 31, 2010, the REIT had $35.4 million of assets including $28 million of real estate owned directly.  The company generated $755,389 total revenue and a $1.5 million net loss.  The shareholder 1.0% dividend is not covered by Funds from Operations or Modified Cash Flow.  The subsidy of dividends at this early phase of the capital raising is common.  As the REIT has less than a year of operations, it is too early to draw any conclusions on the effectiveness of management.

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[1] Modified Cash Flow is a Clarity Finance measure which equals (1) net income plus (2) depreciation and amortization, plus (3) acquisition fees and expenses, less (plus) (4) any realized or provisions for capital gains (losses) on the income statement, less (plus) (5) income (losses) from unconsolidated entities, plus (6) distributions from unconsolidated entities.