Desert Capital REIT sells off subsidiary

Desert Capital REIT, a Henderson-based real estate investment trust, reported Friday that it sold its Consolidated Mortgage subsidiary to four insiders at Desert Capital, for $28.3 million in cash, stock and notes.

Consolidated Mortgage originates and services short-term mortgage loans for the REIT and for investors who buy fractional interests directly in loans. It has 3,800 shareholders.

Desert Capital decided to sell Consolidated, partly because Consolidated Mortgage's fees for loan origination and servicing were making it difficult for Desert Capital to retain its REIT status, CEO and Chairman Todd Parriott said.

In addition, REITs must obtain most of their income from rents, interest, dividends and gains from the sale of real estate.

REITs don't pay corporate taxes but must distribute most of their income to investors. If Desert Capital lost its REIT status, all of its income would be taxed at the corporate level.

Desert REIT on Nov. 21 sold Consolidated to Parriott and three others who own a company called Sandstone Equity Investors.

The sales price included $105,000 in cash, $8.25 million to be repaid in installment payments, a $15.5 million promissory note and 293,000 shares of stock that the company valued at $15 each. Parriott said he and the others paid cash for those shares earlier and that those shares will be retired, thus benefiting remaining shareholders at Desert Capital.

However, Parriott said the book value of the REIT shares is about $10. He declined to make any estimate of revenues that the REIT would lose as a result of the sale of Consolidated Mortgage.

The fairness of transaction was evaluated by independent directors, a professional firm and lawyers. But Parriott said the company wasn't required to hold a shareholder vote on the sale.

Desert Capital bought Consolidated for $13.5 million, including $9 million in cash, from the Frank Farrar Family Trust in 2004. The payments were made in several installments.

Desert Capital hopes to go public on the New York Stock Exchange or it will be liquidated in 2011, Parriott said. Meanwhile, Desert Capital publicly reports its financial results.

The lender reported that it has $203 million in assets, including $151 million in mortgage investments. It reported $50 million in nonperforming loans on Sept. 30, compared with zero a year ago. The loans are secured by real estate.

"We have not had losses incurred due to the fact of (good) underwriting," Parriott said. "We feel we have the ability to recover these loans and put that money back at par (in the REIT)," he said.

Desert Capital earned $741,000 in the quarter ending Sept. 30, down from $3.6 million a year ago.

Contact reporter John G. Edwards at jedwards@reviewjournal.com or (702) 383-0420.