Tuesday, May 12, 2009
Greetings Member-Partners of the IGW REIT,
After much effort between our auditors at KPMG, our accounting team, legal counsel, and the property valuation specialists at Colliers International, both the current Pricing Net Asset Value (NAV) calculation for the IGW REIT is now complete. The new Offering Memorandum will be finalized shortly. This being the first time performing these complex tasks, it took a bit longer than anticipated. We apologize for the delay in making this announcement.
As you know we are constantly reviewing our operations and systems to ensure timely and appropriate management decisions. We have learned that it can take more than 30 days after a calendar quarter to receive and analyze the data needed to determine the Net Asset Value of the REIT and the corresponding Pricing Net Asset Value per Unit. We have determined that a 60 day period is more appropriate and accordingly will move to a Valuation Day cycle of the last day of February, May, August and November from now on. As well, we now expect to be delivering the financial statements for the preceding calendar quarter by those dates.
New IGW REIT Unit value independently confirmed
The Colliers report sets the current price for the (Class A) IGW REIT Units at $1.014. This is down $0.103 from the previous quarter. Distributions remain unchanged at 10.05 cents per unit, per annum. The current distribution rate, based on the amount currently distributed per unit and the price of $1.014, is 9.91%.
The value and distribution of the One-Year and Two-Year Income Priority Units (IPUnits) remain unchanged. As indicated in recent communications, we expect to issue new series of IPUnits in the near future.
Repricing of Class A IGW REIT Units purchased last quarter
As you know the quarterly re-pricing of our Class A units on Valuation Dates set 30 days after the end of a calendar quarter, is intended to provide assurance that the price paid for a Class A Unit (and after May 1, 2009, also for Class AA Units) will reflect the underlying value of our net assets.
We believe that this is a better approach for determining value than the market pricing of the securities of public REITs. The revaluation process is based on a number of elements including the information resulting from the annual audit of our financial statements, professional reports from independent real estate appraisers, and the operating results of properties as reported by our property managers.
As this is a judgment exercise, it is always subject to retesting and review, as we look back whenever we later receive more concrete information. With the finalization of our December 31, 2008 audited financial statements, and consideration of the analysis that we made in January, we have determined that it is fair to those who have purchased Class A Units based on the January 31st Pricing NAV per Unit to re-price the Class A Units purchased between February 1 and April 30, 2009 to $1.083 per Class A Unit.
We anticipate that within 60 days, those investors, will receive confirmation of this change by mail, as well as certificates for the additional units to which they are entitled for the amount they invested. Additionally, those investors will be receive retroactive adjusted distributions reflecting the new additional Class A Units being issued as a result of the repricing. We will work as quickly as we can to have these Units reflected in your account statements, issue the additional Unit Certificates, and pay the adjusting distributions.
Valuation disappointing
In our continuous effort to be transparent, we brought in new valuators so that the value of the IGW REIT portfolio would be based upon independent and simultaneous appraisal of the entire REIT portfolio, semi-annually. We believe that this change had an effect on valuations which was not a function of our operations. Different appraisers may give weight to different factors and make different assumptions, which can have a significant impact on the final results. Such impacts are magnified when applied to an entire portfolio of properties simultaneously. Previously, some properties had not been revalued in more than six months. Now that Colliers will conduct complete portfolio revaluations semi-annually, chances of significant variances will be greatly reduced.
Right up until we received the final Collier's report, we believed the REIT's unit value would stay relatively stable - even given the fact that the revaluation was being conducted at an extremely low-point in the economy. We were disappointed to learn that the credit crisis and global recession had a greater effect on commercial property valuations than anticipated, and that all the improvements we had made were not quite enough to offset these external forces.
The Good News
The bright side - thanks to the complete portfolio revaluation by Colliers International - is that the unit values have been independently re-calibrated to the current economic climate, and we have a solid baseline from which to move forward. Furthermore, the Colliers report identified several areas where value could be further enhanced, and where we've left value on the table, so to speak. Now we're going back to get it.
Creating Value
Focusing on the windshield rather than the rear-view mirror, our Asset Development and Management teams are already taking steps to create new value. Further down I will outline what those steps are, as well as what we've learned.
Analysis and Open Discussion
Keeping in mind that I am writing to some 1,500 Member-Partners and another 6,500 potential investors on our mailing list, I have prepared this letter in two parts. The first is a summary of the Pricing NAV results, and how we plan to add value to the properties in time for the next quarterly and semi-annual revaluations. The second part provides more detailed analysis of the what, why, and how of the matter. (Click here to download the Analysis and Explanation).
If after reading this letter you still have questions, please contact us. Not only do we genuinely care about your concerns, your feedback and suggestions are vital to improving our operations and communications.
Incidentally, some of you may be wondering if -- according to our remuneration policy -- we took a share of earlier increases in value of any of the properties that have since been revalued downwards. The answer is no. The only property for we've earned incentive management fees upon refinancing was Market Square - a property that has since increased in value.
I will tell you more about this new feature in a forthcoming letter.
The REIT's performance in perspective
Although we are disappointed that the new valuations did not meet our expectations, we are pleased to point out that even in this climate we surpassed the TSX Stock Index and the Bloomberg REIT Index by 29.2% and 52.8% respectively (see charts attached). This is no small feat - and it is evidence of the success of our investment strategy, hard work, and the potency of the incentive fee structure that keeps us financially motivated.
Even so, we must accept that there will be occasions, in spite of our best efforts, when we will fall short of our goals. But like you, we are in it for the long haul. We won't give up.
Confidence in your investment
Using Member-Partners' capital to buy speculative properties and hoping the market will "go our way" has never been part of our strategy. At League, we don't buy "trophy" properties, we make them. I'm proud to say we beat the markets by rolling up our sleeves and doing the hard work ourselves. We do not leave the accumulation of Intergenerational Wealth™ to chance, and we don't believe you do either.
If you doubt our resolve, just watch us over the next 90 and 180 days! The current unit price will remain in effect until the next revaluation. In the meantime, I will provide reports on the progress of our value-creating efforts.
Current valuation provides opportunity
As the credit crisis reduced real estate financing availability, fewer investors have been able to buy properties, and the reduction in demand lowered prices everywhere. However, we're confident that when the economy improves and credit markets ease, values will rise accordingly. Meanwhile, the REIT's cash flow continues to be positive, and we anticipate that in the coming weeks it will be further improved through new financing currently being negotiated, and as a result of the other strategies and improvement projects outlined below.
Two-Way Communication
Our success depends on the support and feedback we receive from you, our esteemed Member-Partners. If you have any words of praise, encouragement, concern, or suggestions for improvement, I hope you will share them with our staff. If you have words of scorn, I hope you'll share them with my partner Adam Gant and me directly. The buck stops with us.
To make it easier, I've created a special email address that reaches us both directly and simultaneously. I hope you will not hesitate to use it. The address is: feedback@league.ca. Please communicate your feelings, opinions, concerns. and complaints. We will not be offended. Quite the opposite. We are committed to you and your success.
Respectfully and sincerely,
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