Starwood Plans Change in Corporate Structure

Starwood execs Barry Sternlicht and Richard Nanula ended months of speculation on August 27 when they unveiled the company’s plan for life after passage of the IRS Restructuring Bill, which took away the ability of paired share REITs to operate assets put under contract after March 26 within the unique structure. Starwood will convert from a paired share REIT into a conventional, tax-paying C corporation. The “twist” in the company’s plan is that via a tax-free merger, Starwood (the reference here is to the REIT portion of the paired share entity) will become a subsidiary of the C corp. The REIT subsidiary will not, however, be publicly traded. (Sternlicht and Nanula didn’t foreclose the possibility that down the road the REIT might be spun off to shareholders as a publicly traded vehicle. However, they also made clear that there are no plans to spin off the REIT and that a spinoff might never take place.) Starwood said it will take a fourth quarter 1998 $1.2 billion charge to earnings. Of that, $1 billion is related to deferred tax liabilities under SFAS 109. The balance is related to writedowns the company will take on some underperforming Asian investments and also to certain severance payments and “retention” bonuses. What follows is a recap of the key features of Starwood’s proposed restructuring. Shareholders will be asked to approve the proposal later this year, with the planned conversion taking place in January 1999. 1. Starwood will convert to a C corp. Via a tax-free merger, Starwood’s REIT will be merged into the C corp. as a subsidiary (non publicly traded). Starwood will continue to own its hotels in the REIT. Future acquisitions would also be made by the REIT (in most instances). Starwood would use REIT operating partnership units to facilitate acquisitions, when appropriate. 2. Starwood’s current dividend of $2.08 per year (52 cents per quarter) will be cut to 60 cents per year. Starwood plans to increase that dividend at 15% annually for at least the next three years. (Starwood’s third quarter dividend will remain at 52 cents. It will drop to 15 cents in the fourth quarter of 1998.) The 60 cents dividend will be paid by the REIT subsidiary (more on how that will work in a bit), so it will be subject to single level taxation. 3. Starwood announced that its board approved a buyback of up to $1 billion of its common shares. A portion of the funds earmarked for Starwood’s buyback (that is, $367 million) will be used to settle the company’s two outstanding forward equity contracts, which are set to expire in October of this year and March of 1999.

Crescent Terminates Forward Equity Deal With Merrill; Announces Rights Offering

Crescent Real Estate Equities has reached an agreement in principle with Merrill Lynch International to terminate its existing forward equity swap arrangement and to repurchase from Merrill Lynch all 6,659,254 common shares held by Merrill Lynch under that arrangement. To secure Merrill Lynch’s position prior to completion of the rights offering (more on that later), Crescent has agreed to deliver to Merrill Lynch a promissory note in the amount of approximately $208.3 million secured by a first mortgage lien on its Houston Center complex. The promissory note will bear interest at 30-day LIBOR plus 75 basis points and will mature on or about December 14, 1998. Crescent also announced a planned rights offering that will provide the company’s shareholders rights to purchase Crescent shares at an exercise price of $22 per share in an aggregate amount of approximately $215 million. Certain principals of Crescent have indicated they will undertake to purchase any shares that are not subscribed in the rights offering on terms and conditions no less favorable to Crescent than could be obtained from an unaffiliated third party. The rights will not be listed for trading. Crescent anticipates the proceeds of the rights offering would be used to repay the promissory note to Merrill Lynch. Separately, Crescent and affiliates of Union Bank, AG exercised the right to extend the term of its forward purchase agreement for one year. Crescent has agreed to purchase 4.7 million common shares from one of the Union Bank affiliates by August 12, 1999.

Public Real Estate Ownership Gains Market Share

Public ownership of U.S. commercial real estate continued its climb during 1997, according to a recently released study by Prudential Real Estate Investors. By year-end 1997, 28.6% of regional malls were publicly held—the highest market share among the various major property types. The report, “Tracking Public Market Commercial Real Estate Penetration From 1995 to 1997,” refines and updates the data published one year ago in PREI’s paper, “Tracking A Capital Market Transformation: Public Market Commercial Real Estate Penetration.” According to the report, market penetration by public owners is as follows: Office: 5.0% (up from 2.2%) Hotel: 17.5% (up from 14.3%) Warehouse: 5.3% (up from 3.6%) Apartments: 6.8% (up from 5.0%) Retail (Mall): 28.6% (up from 24.7%) Retail (Non-mall): 10.0% (up from 9.0%) Bernard Winograd, CEO of PREI and one of the paper’s authors, said, “We remain convinced that the evolution of commercial real estate toward increasing public ownership is inevitable.”

NAREIT Takes Issue With FASB Change

In May 1998, the Financial Accounting Standards Board’s Emerging Issues Task Force issued EITF 98-9, “Accounting for Contingent Rent in Interim Financial Periods.” EITF 98-9 provides that a lessor shall defer recognition of contingent rental income in interim periods until specified targets that trigger the contingent income are met. In July 1998, the Task Force issued transition guidance stating that the provisions of EITF 98-9 could be applied on a prospective basis or in a manner similar to a change in the accounting principle effective April 1, 1998. The new accounting practice mainly affects hotel, health care, and retail-oriented REITs that customarily lease property using the “percentage” rents approach. Under this approach, a portion of the total rent owed for the year by the tenant is linked to a “percentage” of the income generated during the year by the tenant. Oftentimes, tenants pay the projected total rent evenly throughout the year and then settle at year end based on actual performance. For affected companies, this change likely will result in lower quarterly earnings early in the year and higher quarterly earnings later in the year compared to similar periods in prior years. However, this change generally should not affect annual earnings reports and does not change the financial condition or earnings capacity of real estate companies that report percentage rents. This accounting change effectively moves the reporting of rental income tied to a tenant’s sales—where a contingency still exists, such as the achievement of the year-end target—to later in the year when the tenant’s final performance is certain and quantifiable, rather than projected and probably based on prior years’ performance. The National Association of Real Estate Investment Trusts, the industry’s Washington-based trade group, has informed the EITF that it disagrees with this change in long-standing accounting practice and has asked the EITF to reconsider its decision during its next meeting scheduled for September 24. NAREIT believes the EITF took this action without adequate notice and without sufficient knowledge of the underlying facts associated with “percentage” rents. “The change in reporting percentage rental income in quarterly statements wrongly suggests an unreliable leasing revenue stream,” says Marti Tirinnanzi, NAREIT’s director of financial standards. “The EITF decision was apparently based on a desire for theoretical consistency with certain other accounting practices. However, the REIT industry is concerned that the EITF did not duly consider the implications of the change for the many companies with long-term, percentage-based leases, which traditionally have reported percentage rental income evenly through the year. Prior period incompatibility and volatile quarterly earnings will seriously diminish the usefulness of quarterly reports for these companies. Mike Kirby, a principal and co-founder of Green Street Advisors, a Newport Beach, California-based buy-side research boutique specializing in REITs and other property-linked stocks, urged the EITF chairman to reverse the EITF position. “Unfortunately, EITF 98-9 represents a step backward to users of the financial statements of any real estate company that receives a material amount of percentage rental income. EITF 98-9 greatly impairs the ability of a management team to assist investors in understanding a company’s financial statements.”

Hotel REITs’ Market Cap Soars

The market capitalization of hotel REITs rose to $19.4 billion in the first quarter of 1998 from just $142.4 million in 1993, according to the Lodging Research Network (www.lodgingresearch.com), an Internet-based resource for lodging industry data and information from PricewaterhouseCoopers. At the same time, REITs boosted their number of owned hotels to 970 in 1998 from 39 in 1993. The total number of hotel rooms in REITs’ hands was 183,784 in the first quarter of 1998, up from 6,643 in 1993, www.lodgingresearch.com says. “In 1993 there were two U.S. lodging REITs,” notes Bjorn Hanson, New York-based chairman of the PricewaterhouseCoopers lodging and gaming group. “Today, there are 15 lodging REITs.” Overall, REITs accounted for over 5% of the total U.S. lodging industry room inventory at the end of the first quarter, according to www.lodgingresearch.com. That’s a 4.8 percentage point increase from REITs’ 0.2% share of room inventory in 1993, the Lodging Research Network reports.

Equity Inns & RFS Call Off Merger

The boards of Equity Inns and RFS Hotel Investors have voted to terminate the merger agreement between the two companies. The two companies had signed a definitive agreement in April to merge in a stock transaction where each share of RFS would have been exchanged for 1.5 shares of Equity Inns. That agreement was based upon Equity Inns maintaining a stock price not below $14 per share during a “measurement period.” Recently, Equity Inns was trading at $10.50 per share. The managements of both companies attributed the scuttling of the merger to changed market conditions. Phillip H. McNeill Sr., Equity Inns’ chairman and CEO, said, “The strong strategic fit we identified when we entered this agreement has not changed.” He added, “We entertained other approaches than the sale of existing RFS leases, including the formation of a separate (paper clipped) company to lease and manage the hotels, but we determined that this approach would not enhance overall value for Equity Inns’ shareholders.” Robert M. Solmson, RFS’ chairman, stated, “Market conditions have changed substantially since the merger agreement was signed. We believe that, in light of those changes, the transaction is no longer in the best interest of our shareholders.”

Brandywine To Merge With Affiliates of Lazard Freres

Brandywine Realty Trust has entered into an agreement to merge with Atlantic American Properties and to acquire a substantial portion of the office and industrial assets of Commonwealth Atlantic Properties, affiliates controlled by Lazard Freres Real Estate Investors. The total consideration is $612 million, including the assumption of debt. In the transaction, Brandywine has agreed to issue LFREI $135 million in convertible preferred securities with a 7.25% coupon that is convertible into common stock at $28 per share. The preferred securities are structured as approximately $37.5 million of convertible preferred shares to be issued by Brandywine and approximately $97.5 million of convertible preferred units to be issued by Brandywine’s subsidiary operating partnership. The convertible preferred units must generally be held by LFREI and its investors and their affiliates until January 2004. The convertible preferred shares can be transferred upon closing. The preferred share structure incorporates a conversion price adjustment to $26.50 if the company’s common stock does not have a $23 average trading price for 60 days prior to January 2004. In addition, Brandywine has agreed to assume approximately $237 million of existing secured indebtedness and draw $240 million from its unsecured credit lines. The AAP and CAP portfolios contain 41 office and 27 industrial properties totaling approximately 5.6 million square feet of space in the Mid-Atlantic region. The properties are approximately 94% leased to a diversified tenant base of over 500 companies. In addition, Brandywine expects to acquire approximately 172 acres of land estimated to accommodate approximately 1.4 million square feet of new commercial space, plus an option to purchase an additional 294,000 square foot office building currently under construction in Tyson’s Corner, Virginia for $68 million.

Bradley Completes Acquisition

Bradley Real Estate has completed the acquisition of Mid-America Realty Investments. The merger was approved by share owners of Mid-America Realty Investments on August 5, 1998. A vote by Bradley share owners was not required. As provided in the merger agreement, each share of Mid-America Realty Investments’ common stock was exchanged for 0.42 shares of 8.4% Series A Convertible Preferred Stock of Bradley Real Estate, with a liquidation preference of $25.00 per share. The 8.4 % Series A Convertible Preferred Stock will be traded under the symbol “BTRPrA” and is convertible into Bradley common stock at any time at a price of $24.49.

RD Capital Acquires Control of Mark Centers Trust

RD Capital has acquired control of Mark Centers Trust. Renamed Acadia Realty Trust, the REIT specializes in neighborhood and community shopping centers and multifamily properties primarily in the East and Midwest sections of the United States. Acadia has relocated its headquarters to New York. The new executive management team is headed by Ross Dworman, chairman and chief executive officer, and Kenneth F. Bernstein, president.

American Real Estate Buys New York Office Buildings

American Real Estate Investment Corp. said it had “substantially consummated” its planned acquisition of a portfolio consisting of 1.3 million square feet of New York State office space from affiliates of Pioneer Development Co. As of late August, the company had acquired 12 of the 15 buildings it’s buying from Pioneer. The 12 buildings, totaling 801,720 square feet, were acquired for a purchase price of approximately $86.1 million. The company expects to complete the acquisition of two of the remaining three properties, totaling 430,636 square feet, at the end of the third quarter. The last acquisition, a 100,000-square-foot building currently under extensive renovation, is to be closed upon substantial completion of its renovation scheduled for January 1999. The total purchase price of the three properties is approximately $43.8 million. In addition, the company retained its option to acquire two additional properties, located in upstate New York, which contain roughly 350,000 square feet for approximately $30 million. The properties were contributed to the REIT’s operating partnership by Syracuse-based Pioneer in exchange for approximately 1.2 million operating partnership units at $16.50 apiece. The balance of the purchase price was in the form of cash and the assumption of related indebtedness.

Colonial Begins Development Projects

Colonial Properties Trust is developing two new office buildings, one in Birmingham, Alabama and one in Huntsville, Alabama as part of what the company terms “an aggressive diversification and expansion strategy.” The first project is a 150,000-square-foot, multitenant office building at International Park, a master-planned, 117-acre office development in Birmingham, Alabama. The $17 million project is expected to have a capitalization rate of 10.5%, and its completion is slated for summer 1999. The second project is Colonial Center at Research Park in Huntsville, Alabama. That development will consist of two buildings with a total of 130,000 square feet of rentable space. The $13 million project is expected to yield 10.5%.

SL Green Adds Two Manhattan Properties

SL Green Realty Corp. has purchased 1412 Broadway —The Fashion Gallery Building—for $72 million plus approximately $5 million for reimbursement of loan prepayment charges and $5 million related to capital expenditures, commissions, and other closing costs. The 389,000-square-foot, 25-story office building has 20,000-square-foot floorplates and has undergone over $5 million in renovations over the past four years. The current occupancy level, including pending leases, is 89.5%. The building’s tenants include Escada, Leslie Fay Inc., and Kasper (USA) Inc. SL Green also has closed the acquisition of an existing first mortgage on 636 11th Avenue, which is a 469,000-square-foot industrial and warehouse block front property located between 46th and 47th Streets, for $10.9 million. The acquisition is the first step in acquiring the entire fee interest in the property, which is contracted to occur in January 1999. Total acquisition costs, inclusive of the mortgage interest in the property, will be approximately $32.5 million.

Camden Approves $50 Million Buyback...Camden Property Trust’s board has approved the buyback of up to $50 million of Camden’s common shares through open market purchases and private transactions. The company expects to purchase the shares over the next six months in lieu of making additional property acquisitions utilizing proceeds from the recently completed sale of assets to Sierra-Nevada Multifamily Investments, LLC and using available cash flow from operations. Ric Campo, Camden’s chairman, stated, “With shares currently trading at a significant discount to our net asset value, we believe we can reinvest free cash into our own shares at yields that greatly exceed yields currently available on direct real estate investments. Since this can be done without incurring additional debt and without reducing our financial flexibility, we believe it is an appropriate strategy to pursue.” Chateau Plans One Million Share Buyback...The board of Chateau Communities has approved a program to buy back up to one million shares of its common stock. Chateau currently has 27.6 million common shares and 3.7 million operating partnership units outstanding. Equity Residential Says It Will Buy Back Shares...The board of Equity Residential has authorized a share buyback of up to $100 million of its common shares. Purchases may be made from time-to-time in open market transactions at prevailing prices or through privately negotiated transactions. Mack-Cali Plans $100 Million Buyback...The board of Mack-Cali Realty Corp. has authorized a share repurchase program under which the company may purchase up to $100 million of its common shares. Purchases may be made from time-to-time in open market transactions at prevailing prices or through privately negotiated transactions. U.S. Restaurant Properties Okays Buyback...The board of U.S. Restaurant Properties has authorized the company to repurchase up to 500,000 shares of its common stock and convertible preferred stock. Any purchases made under the program will be made from time-to-time in open market or privately negotiated transactions. The repurchase program will continue until the company acquires 500,000 shares or until the board terminates the program.

Crescent Hikes Dividend...Crescent Real Estate has raised its quarterly dividend by approximately 45%, from 38 cents to 55 cents per share. The increase is effective for the quarter ending September 30, 1998. Parkway Hikes Dividend...Parkway Properties has raised its quarterly dividend by 29% from 35 cents to 45 cents per share. Parkway said the dividend increase payable on September 28, 1998 reflects growth in the company’s funds from operations and will allow Parkway to satisfy the annual distribution requirements necessary for it to qualify as a real estate investment trust. U.S. Restaurant Boosts Payout...U.S. Restaurant Properties has raised its annual dividend from $1.43 to $1.67 per share. The 16.8% dividend hike goes into effect with the company’s fourth quarter dividend and is payable on December 15, 1998.

Jones Gets New Post at Cousins Properties...Craig B. Jones has been named president of Cousins Properties’ office division. Jones joined Cousins in 1992 and has had responsibility for a number of activities, including overseeing Cousins’ shopping center development program on the West Coast and working with Cousins/Richmond, the medical office division. Most recently, he has headed the office division as senior vice president with responsibility for its development, leasing, and property management activities, as well as coordinating several of the company’s joint venture relationships. Alexandria Names President...James H. Richardson has been named president of Alexandria Real Estate Equities. Richardson, who joined Alexandria in August 1997, most recently served as executive vice president for acquisitions. Prior to joining Alexandria, Richardson had a 15-year career at CB Commercial, most recently as senior vice president and area manager for the Silicon Valley region. LaSalle Gets New CFO...Hans S. Weger has been named chief financial officer of LaSalle Hotel Properties. Before joining LaSalle, Weger served as LaQuinta Inns’ treasurer. Peterson Moves to American Real Estate...Timothy A. Peterson, formerly executive vice president of finance at Post Properties, has been named senior vice president and CFO of American Real Estate Investment Corp. in Plymouth Meeting, Pennsylvania. George Joins Reckson...Christopher George has joined Reckson Associates Realty Corp. as senior vice president of strategic investments, a newly created position. George will focus on the strategic direction of newly formed entities and relationships and coordinate the internal communication of their strategies. George will serve in a similar capacity for Reckson Service Industries. He also will work with the management teams of each entity to assist them in effectively communicating their business strategies to the investment community. Prior to joining Reckson, George was a research analyst and a managing director in the equity research department of Bear, Stearns & Co.

Wells Offers S&P REIT Index Fund...Atlanta-based Wells Real Estate Funds is offering a mutual fund that duplicates the S&P REIT Index. The index includes the three broad categories of REITs: equity, mortgage, and hybrid. The REITs are allocated across all major property types, including office/industrial, residential, retail, healthcare, self-storage, and hotels. The 105 REITs included in the index were chosen based on a number of criteria: All REITs below the 70th percentile in terms of market capitalization were eliminated; only NYSE, AMEX, or NASDAQ National Market System securities were included; companies with a share price under $1 were excluded; REITs that did not pay dividends the previous fiscal year were excluded; REITs with more than three no-trade days in the previous 12 months were dropped from the index; and IPOs must have at least a two-month trading history before being added to the index. Chicago Merc To Offer REIT Futures...The Chicago Mercantile Exchange is seeking regulatory approval to trade futures and options on the Standard & Poor’s REIT Composite Index. As of June 30, 1998, the total capitalization of the REITs included in the index was nearly $131 billion. The CME board of directors approved the proposal to trade REIT futures and options at a scheduled meeting in late August. Meditrust Amends Ownership Limits...The board of the Meditrust Cos. has granted an exemption to the restrictions regarding stock ownership limits specified under the companies’ Certificates of Incorporation. This action permits those individuals and entities associated with certain members of the Bass family of Fort Worth, Texas, who currently own approximately 12.9 million common paired shares or approximately 8.7% of the outstanding common paired shares of The Meditrust Cos., to increase their ownership to 9.99% of the companies’ outstanding common paired shares (an increase of approximately 1.8 million common paired shares), subject to certain conditions. FAC Realty Trust Changes Name...FAC Realty Trust has changed its name to Konover Property Trust. The company’s shares will continue to trade on the Big Board, now under the symbol KPT.