by Barry Vinocur

It used to be that investors could count on the chief executive officers of real estate investment trusts to dig in their heels and hang on for dear life if a suitor came knocking. Putting themselves out of jobs wasn’t high on their list.

Take the case of David Martin, the former head honcho at Burnham Pacific Properties. When Jay Schottenstein of Schottenstein Stores floated a $13 per share offer for Burnham in June 1999 (he later upped his bid to $13.50 per share), Martin and the Burnham board did what for too long has passed for standard operating procedure in REITland. They immediately instituted a shareholder rights plan and put in place golden parachutes that were so rich no one-with the possible exception of Martin, the Burnham board, and the other executives who stood to benefit-could defend with anything approaching a straight face.

Roughly 15 months after Schottenstein made his bid, Martin resigned (leaving his golden parachute behind) and the Burnham board decided-after failing to find a suitor willing to pay even $6 per share for the company-that liquidation was its best option. Now, the company that its chairman, Malin Burnham, told shareholders roughly one year ago in a letter filed with the Securities and Exchange Commission was worth more than Schottenstein was offering is hoping against hope that shareholders might get $7 to $8 per share over the next roughly two years.

Though an egregious example of management entrenchment resulting in the destruction of shareholder value, the Burnham story sadly isn’t as rare as investors might hope. All too often over the past roughly 15 years, REIT managements and boards (the problem isn’t unique to REITs, of course) have dug in their heels in an effort to hang onto their paychecks and perks. If they were ultimately dragged kicking and screaming to the altar, it was only after spending all too often millions of shareholders’ dollars trying to preserve their jobs.

Contrast that business as usual approach to dealing with suitors with a trend that frankly has yet to receive the attention it deserves. Consider, for instance, the case of Bradley Real Estate and its CEO, Tom D’Arcy. In mid-May, Bradley announced it had agreed to be acquired by Heritage Property Investment Trust, a private real estate investment trust headquartered in Boston, for $22 per share. That was nearly a 20 percent premium over the price Bradley was changing hands at the Friday prior to the announcement and more than a 30 percent premium over its price roughly one month earlier, just prior to last spring’s "tech wreck."

Bradley’s D’Arcy walked away with some cash, though hardly a huge windfall, and a lot less than Burnham had agreed to pay Martin via his abandoned golden parachute. By all accounts, D’Arcy and the Bradley board had done the right thing for shareholders. Not only had they sold the company at what was widely viewed as a handsome price, but they also hadn’t tried to enrich themselves in the process. Further, by all accounts, D’Arcy worked tirelessly until the deal closed, not only ensuring a smooth transition but also doing what he could for each of Bradley’s employees.

Roughly a month after the Bradley announcement, Pacific Gulf Properties, a Newport Beach, California-based REIT that owns industrial properties and apartments, agreed to sell its portfolio of industrial properties to CalWest Industrial Properties, a joint venture between CalPERS (California Public Employees’ Retirement System) and RREEF, an institutional manager.

The announcement followed Pacific Gulf’s previous announcement that it was marketing its multifamily properties for sale, as well as examining strategic alternatives for its active senior rental housing operations (see sidebar on page 18).

By all accounts, Glenn Carpenter, Pacific Gulf’s CEO, and the company’s board concluded that the offer was simply too good to pass on. Carpenter reportedly had believed for some time that the market was underestimating his company’s value. Said one industry veteran, "Glenn saw the offer as validating his long-held view, not as something that had to be repelled so as to hang on to his job."

Carpenter said at the time the deal was announced, "We believe these transactions represent the best means in the current market environment to realize the true value of the company’s assets and to deliver that value directly to our shareholders. We view these steps as particularly opportune in light of ongoing real estate valuation discrepancies between the public securities and private real estate markets, and the continued high cost of capital for REITs."

In late August, Western Properties, a strip shopping center REIT based in the San Francisco Bay Area, which earlier had hired an advisor to explore strategic alternatives, agreed to be acquired by Pan Pacific Retail Properties, a southern California-based REIT also specializing in strip shopping centers.

The proposed transaction values Western at approximately $440 million including transaction costs and the assumption of approximately $200 million of debt. It is being structured as a tax free, stock for stock exchange whereby Western common shares will be exchanged into newly issued Pan Pacific common shares, based upon a fixed 0.62 exchange ratio. As a result, Pan Pacific will issue approximately 11.7 million common shares and units to Western’s equity holders, representing a 34 percent pro forma interest in Pan Pacific on a fully diluted basis. In addition, Pan Pacific will assume Western’s $125 million senior notes and a $10 million mortgage.

Western’s CEO, Bradley Blake, said at the time the deal was announced, "We believe Pan Pacific will provide Western shareholders the opportunity to realize superior growth and enhanced value as they participate in the benefits of greater size, geographic and tenant diversification, liquidity, and market leadership."

Once again, Blake, who inherited a tough situation when he took over management of Western in January 1998, realized that rather than hanging on for dear life, the best alternative was to pursue a sale of the company’s assets. "Brad did the right thing for shareholders," said a senior executive with another REIT, who spoke on the condition of anonymity.

D’Arcy, Carpenter, and Blake aren’t the only CEOs doing the right thing for shareholders. Earlier this year, Philips International Realty, another REIT, settled on an innovative transaction that allowed the company’s founder, Philip Pilevsky to do the right thing for shareholders while at the same time structuring a tax efficient transaction for himself and his family. Pilevsky retained a core group of properties, thereby avoiding a major tax hit, and sold the other properties to Kimco Income REIT, an affiliate of Kimco Realty Corp., a REIT that is one of the largest owners of strip shopping centers.

As we were going to press, two other deals were announced that also are being viewed as instances of managements putting the interests of shareholders first.

In a whopper of a deal, Rodamco North America N.V., a Dutch-based U.S. regional mall property owner agreed to acquire Urban Shopping Centers, a Chicago-headquartered REIT that is an owner and operator of U.S. regional malls for $48 per share in cash (see "Urban To Be Acquired by Rodamco for $3.4 Billion" on page 6 in this issue). The price represents roughly a 39 percent premium over the price at which Urban’s shares were changing hands prior to the deal being announced after the close of trading on September 25.

Though most industry veterans said Rodamco was paying a very rich price for Urban, the bottom line for shareholders was that management (which collectively owns roughly one-third of the company) had jumped at the chance to maximize value for all of the REIT’s shareholders.

The other announcement was by First Washington Realty Trust which entered into a definitive agreement to sell its company to U.S. Retail Partners, a joint venture of the California Public Employees’ Retirement System (CalPERS) and National Retail Partners, for a total consideration of approximately $800 million to be paid in cash together with the assumption of certain indebtedness.

First Washington’s management estimated net proceeds from the transaction, after the payment of debt and other liabilities and the payment of transaction expenses, will yield approximately $26 per share (and approximately $33.33 per share of preferred stock in cash). The estimated share price represents a roughly 25 percent premium over First Washington’s closing price on September 27, 2000.

Stuart Halpert, First Washington’s chairman said, "This transaction permits First Washington to realize today, in the ‘short run,’ what we had heretofore regarded as a longer term objective, and that is a materially higher stock price." He added that for an extended period of time, his company has traded substantially below what management believed to be its net asset value. "In this transaction, assuming a liquidation price of approximately $26 per share, our common stockholders will realize a 28.6 percent premium to their stock’s trailing 52-week average closing price."

Whether or not the rumors are true that more of these deals are in the works, the six deals cited here represent solid evidence that it’s no longer "business as usual" in REITland. The actions of these management teams not only serves to put other REITs on notice regarding the need to maximize value for shareholders-even if it means putting oneself out of work-but also sends a message that the sort of shenanigans that took place at Burnham Pacific will no longer pass for what shareholders expect from REIT managements.

Liquidation Analysis

In a recent note, A.G. Edwards’ Art Havener presented a liquidation analysis of Pacific Gulf. The analysis is instructive both as it relates to Pacific Gulf and, more generally, in view of a number of recently announced liquidation plans. Here’s Havener’s take on PAG’s liquidation. Pacific Gulf recently released its preliminary proxy detailing the proposed sale of its industrial and multifamily assets. The final proxy should be released in early October 2000. In addition, PAG announced it has agreed to sell 1,139 apartment units for $92.9 million (or $81,563 per unit). We had previously applied an 8% cap rate on these assets and calculated a $74,600 per unit figure. In total, gross proceeds from the sale of PAG’s multifamily portfolio should approximate $133 million, a figure that is higher than what was originally communicated by management. On the last conference call, management indicated that it was expecting $120 to $125 million for the multifamily portfolio. Management expects to sell the three remaining assets in September or October 2000, so the proceeds should be included in the November 2000 liquidation payment. We continue to stress that we would not be surprised if the November 2000 liquidation payment were to exceed the $26.00 per share amount that management has referenced. CalWest has not identified any problems with the industrial portfolio. As we have stated, we expect the third quarter dividend of $0.44 per share will be added to this liquidation payment. It is the company’s intention to minimize the number of liquidation payments (due to associated costs) to two payments, if possible. There are many uncertainties regarding the final outcome of PAG’s liquidation, including the timing and the dollar amounts of the actual distributions. The only thing we are certain of right now is that PAG will completely liquidate 24 months following the first payment, expected to occur in November 2000 (pending shareholder approval). We encourage shareholders to approve the liquidation as management has demonstrated its willingness to maximize shareholder value. While we have identified the expenses listed in the proxy, there could be additional expenses incurred in association with either the industrial or multifamily transactions. In addition, while the management of PAG has indicated it doesn’t anticipate carrying over any cash balance to the StubCo, it may be necessary to incur a cash balance for working capital purposes, additional insurance, etc. We continue to believe the November liquidation could prove to be greater than $26 per share. Furthermore, we believe we have incorporated our assumptions on a conservative basis. Our 26 million share count incorporates: the December 31, 1999 balance of 20.6 million common shares, 2.8 million preferred shares converted, approximately 900,000 limited partnership units, approximately 635,000 variable options, and 1.285 million options. We expect the StubCo to exist for a minimum of six months following the November 2000 liquidation payment due to the lock-up on the contingency fund, unless CalWest were to sign an agreement prior to this time period (an unlikely scenario, in our opinion). However, PAG appears more interested in shortening the liquidation time period. Thus, we would not anticipate that the StubCo will exist one year from now. It is important to note the trophy development project, The Fountains at Anaheim Hills, a 259-unit project, will be completed in November 2000 and will have tax-exempt bond financing attached to it. Another development project, 244-units, The Fountains at Temecula also will be completed by year-end 2000. PAG has another 400 units under development and four projects not included in some form of the entitlement process. It appears that PAG may ink a deal with CalWest to continue managing the industrial portfolio for a 3% of revenue based fee. There is no agreement at this time, however.