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View Celeste Hathway's Comments
NTS Realty - Long Way To Go
You can find the original complaint at Wohl & Fruchter, LLP
Feb 5, 2014. 02:09 PM
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Termination Risks Of NTS Realty Holdings Offer Asymmetrical Risk Reward Profile
[x] The Dannis lawsuit filed in Kentucky is not going away, because the defendants filed a motion to dismiss and the judge denied the motion. So, Nichols is being forced down the same path towards a settlement as the one that led to the creation of NTS Realty in 2004. Negotiations between the sides have stalled, which means that they are far apart on value and unlikely to enter into a settlement agreement before 30-Sep-2013.
[x] The Dannis plaintiffs do not hold enough votes to block the merger, but Nichols hasn’t scheduled a limited partner vote even though as you say, the market had been pricing a 90%+ probability of deal close since 30-Apr-2013. Instead, he says that the 30-Sep-2013 close is “not realistic”, which means you can essentially rule it out.
[x] If Nichols walks away from the deal then NLP will price at a discount to its peers because: 1. NLP revenue growth has not translated into FFO growth, 2. Unit holder distributions have not grown in line with revenue and 3. Nichols and Lavin have not disclosed a plan to restructure NLP's weak balance sheet.
[x] Nichols cannot afford to pay more, because he would have to reduce capex and/or reduce his expense structure for a higher offer price financed at a higher interest rate. In order to maintain FY2012 AFFO levels at 15% of consolidated net operating income under the current deal terms and assuming 0% revenue growth year-on-year after deal close, the expense structure would have to be reduced by 10%. Restating FY2012 AFFO as if the deal had occurred at the beginning of the year would result in -$122k AFFO assuming capex of 12% consolidated NOI versus $376.9k at 10% consolidated NOI. So, reducing capex leaves him very little room to pay more unless he can raise additional equity because the AFFO becomes very negative.
[x] The Quince lender fee structure is exorbitant (4.5% merger consideration). Quince anticipated the scenario that Nichols is facing right now with the litigation. Why? Because, even if Nichols were to satisfy all other conditions and get the deal approved in a limited partner vote, but with litigation pending, he would have to pay $238k/mo (9% annualized) to keep the Quince loan available while fighting the lawsuit. Despite the $345k of sunk costs, Nichols could not justify this open-ended monthly fee to his Board.
[x] Settling one or both allegations in the Dannis lawsuit will require Nichols to raise more equity because the opportunity cost for the plaintiffs is low: 1. Due to the nature of class action securities litigation retainers, the plaintiffs may not have to pay any legal fees to realize their desired outcome, 2. They are emboldened by the past history of judgments against Nichols in securities litigation against him and his companies and 3. The plaintiffs are indifferent towards whether Nichols can actually afford to pay more. A settlement is not imminent because if it were, then NTS would have described an accrual amount for a pending settlement agreement in the CQ2:13 10-Q.
Sep 10, 2013. 04:17 PM
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