Winter 2000
	Cover Story REITs at the Millennium Industry veterans look into their crystal balls. Where are REITs headed? Company Spotlight Can Crescent Get Its Groove Back? John Goff is working to restore Crescent Real Estate Equities’ reputation as a REIT that "gets it." Property Fundamentals Lack of Correlation J.P. Morgan’s Michael Giliberto provides answers to the age-old question, "Are REITs really real estate?" Awards Spotlight Best & Brightest Realty Stock Review’s eighth annual awards presentation recognized the top vote getters in a number of categories, including outstanding analysts, CEOs, and CFOs. Voters also chose the industry’s man of the year and men of the decade. Investment Analysis Applying MPT to REIT Portfolios Careful portfolio construction can make or break the performance of a pool of assets. Investment Fundamentals The High Cost of Real Estate Ownership Swapping net income for FFO might not be such a bad idea after all. By The Numbers A Fund Manager’s Worst Nightmare If it’s true that what doesn’t kill you makes you stronger, real estate fund managers may be some of the strongest folks around. Point Of View REITs and Rights Plans Criticism of REITs that adopt rights plans is simply misplaced. Investment Spotlight Spooked What happens when more than a dozen REIT UITs start unwinding in the midst of the worst bear market in a quarter of a century? The New Economy When Worlds Collide The Internet will provide investment opportunities for innovative office and retail real estate companies that embrace the changing landcape. Investment Insight LBO Math The market is beginning to understand that LBO valuation does not equal net asset value. Parting Shot Coming of Age REITs have evolved from pools of properties to focused real estate operating companies. Newsline Captec Wants to Shed REIT Status Investor's Guide Questions Back Issues Feedback

In a prepared statement, Captec said, "… the combined company will be a fully integrated real estate specialty finance company focused on the net lease and franchise finance sectors." It added that the combined company would focus on value-added opportunities through a combination of investments in restaurant and retail properties net-leased to national and regional chains as well as the origination, securitization, and servicing of loans to operators of franchised restaurants.

"In merging these affiliates, Captec is adopting new business strategies that are inconsistent with the real estate investment trust format. Subject to shareholder approval of these transactions, Captec plans to change its tax status from a REIT to a C corporation, allowing significantly greater flexibility in operating its business, selling assets to maximize its return on investment, and investing in a broader variety of assets. Additionally, as a C corp., Captec will no longer be required to distribute 95 percent of its taxable income to shareholders, enabling the company to use retained earnings to expand upon and accelerate its growth strategies."

Patrick Beach, Captec’s chairman and CEO said, " Our strategic restructuring recognizes that the net lease business is fundamentally a finance business that can operate more effectively without being subject to restrictive REIT rules." He added, "Conversion to a C corp. structure will allow us to switch from a ‘buy and hold,’ income-oriented strategy to a profit-maximizing mode focused on producing significantly higher earnings per share growth and return on equity."

The restructured company intends to pay a quarterly cash dividend of 11cents per share, or 44 cents per share annually, once the transaction is completed (down from a quarterly dividend of 38 cents per share). Separately, Captec announced that its board of directors approved a 500,000 share buyback. The news of Captec’s plan sent the stock down by 11.5 percent, to $6.25 per share.

As of September 30, 1999, Ann Arbor, Michigan-based Captec owned and/or managed a diversified portfolio of 257 freestanding restaurant, retail, and entertainment properties throughout the United States, with an average occupancy of 95 percent.

Cadillac Fairview Cuts Deal With Canadian Pension Fund
Cadillac Fairview Corp. and the Ontario Teachers’ Pension Plan Board recently signed a definitive agreement, the terms of which state that a wholly owned subsidiary of Teachers will acquire all of the outstanding common shares of Cadillac Fairview not already held by the fund for C$34 per share on an all-cash basis for an aggregate price of approximately C$2.3 billion. (Teachers was already the company’s largest shareholder, holding approximately 21.8 percent of its outstanding common shares.) The company said it expected to send shareholder meeting materials to its shareholders in mid-December. If approved by shareholders, the company expects the transaction to be completed by the end of January 2000.

Headquartered in Toronto, Cadillac Fairview is one of the largest owners, managers, and developers of commercial real estate in North America. The company focuses on retail centers in Canada and the United States and office properties in major Canadian cities. It owns interests in or manages 102 properties totaling 51 million square feet in the United States and Canada, including Toronto Eaton Centre and Toronto-Dominion Centre in Toronto, Pacific Centre in Vancouver, and Montreal Eaton Centre in Montreal. Cadillac Fairview’s stock is listed on The New York Stock Exchange and The Toronto Stock Exchange under the symbol CDF.

Franchise Finance Forms Alliance With Washington
Franchise Finance Corporation of America, a Scottsdale, Arizona-based REIT, and Washington Mutual have formed a strategic alliance for the sale and purchase of commercial loans. As part of the agreement, Washington Mutual will purchase loans originated by FFCA, a single-tenant retail property lender. Under the agreement’s terms, Washington Mutual will retain the loans in its portfolio. FFCA will receive fee income from the loan originations and servicing income on the loans sold, and its affiliate will sell loans to Washington Mutual for a profit. It is expected that Washington Mutual will purchase approximately $4 to $5 billion in loans during the three-year agreement. The three-year agreement between FFCA and Washington Mutual also has two one-year renewal options. Warrants for two million FFCA shares have been issued to Washington Mutual.

At the time of the announcement of the alliance with Washington Mutual, FFCA said it was boosting its annual dividend by 8.2 percent, from $1.96 to $2.12 per share. The company also stated its board of directors had authorized the repurchase of up to 7.5 percent of the company’s outstanding common shares from time-to-time in open market or privately negotiated transactions. "The timing of the purchase and the actual number of common shares purchased will depend on market conditions," the company added.

FFCA is a single-tenant retail property finance company that focuses on providing real estate financing to multiunit operators of chain restaurants, convenience stores, and automotive service and parts outlets. The company’s financing alternatives include long-term real estate leases, construction and acquisition financing, and mortgage and equipment loans. As of September 30, 1999, FFCA had investments in approximately 5,200 properties (including interests in securitized loans) in 48 states and Canada.

American Industrial Evaluates Options
American Industrial Properties, an Irving, Texas-headquartered real estate investment trust, recently confirmed a report by Realty Stock Review Online (www.realtystockreview.com), one of Property’s sister publications, that it hired Salomon Smith Barney and Prudential Securities to assist the company in evaluating strategic alternatives aimed at increasing shareholder value. In a prepared statement, American Industrial said "those alternatives include, but aren’t limited to, a merger, sale, or other business combination involving the company, a sale of all or a portion of the REIT’s assets, or continuing to pursue a growth strategy."

According to several sources, three bidders were interested in the company’s portfolio and were in the process of doing due diligence on it, as we went to press. Two of the three bidders were reportedly an opportunity fund sponsored by Donaldson, Lufkin & Jenrette, and Archon. The identity of the third bidder wasn’t known. The company declined comment beyond the information contained in its November 24 press release.

American Industrial is focused on the light industrial/office flex property sector, including office showroom, service center, and flex properties, low-rise office and small-bay distribution buildings. The company’s portfolio of 156 buildings comprises more than 8.3 million square feet in 12 states. The company was founded in 1985. Its stock trades on The New York Stock Exchange under the ticker IND.

Burnham Pacific Studies Alternatives
Burnham Pacific Properties disappointed investors and analysts when it reported third quarter earnings in November 1999. The San Diego, California-headquartered retail REIT reported funds from operations of 28 cents per share, which was 7 cents shy of the Street consensus. On its earnings conference call, Burnham said its board of directors "had instructed management and Goldman Sachs & Co. to expand the scope of their activities to include actively pursuing a full range of strategic alternatives."

In a prepared statement, J. David Martin, the company’s president and CEO said, "Like most publicly traded REITs, our stock price and public market financial flexibility have been negatively impacted by the current market environment. That said, we believe we have an excellent portfolio of properties that have the potential for higher valuation. Therefore, we are pursuing all of our opportunities to maximize shareholder value. Separately, we have already commenced the active marketing of certain properties to provide the company with additional liquidity and financial flexibility."

Industry sources told Realty Stock Review, one of this magazine’s sister publications, that in addition to Schottenstein Stores (see "Caught in the Middle," Property, November/ December 1999, page 20), which in early June 1999 unveiled an unsolicited $13 per share offer for the company, that there were several others interested in acquiring all or a portion of Burnham’s assets. Edens & Avant, a private real estate company based in Columbia, South Carolina, was among those expressing interest in Burnham, according to the newsletter’s sources. The same sources also said Burnham’s Martin was talking with GE Capital about backing him in a bid for a portion of the company’s current portfolio. The same sources also told the newsletter that Goldman Sachs was circulating books to interested parties, and that they expected an announcement within 45 to 60 days (roughly late January to early February). Calls to Burnham’s Martin by this magazine and Realty Stock Review were not returned.

First Industrial Rejiggers Its Game Plan
First Industrial Realty Trust recently stated it will focus on the nation’s top 25 industrial real estate markets due to increases in the demand for industrial real estate from e-commerce and supply chain management. This includes exiting eight current markets and entering four new markets.

Michael W. Brennan, the company’s president and CEO said, "This strategic repositioning supports a core element of First Industrial’s growth plan: meeting the increasing demand for industrial real estate from e-commerce and supply-chain management initiatives."

First Industrial said the 25 markets were selected based upon three criteria: (1) the target markets must have strong industrial real estate fundamentals, including increased industrial demand expectations from e-commerce and supply chain management; (2) the markets must have a history and future outlook for continued economic growth and diversity; and (3) each market must contain a minimum of 100 million square feet of industrial space. The company added that the market-selection process, conducted over the last 12 months, was based on its own research and that of third-party experts.

At the time of the announcement in early December 1999, First Industrial had holdings in 21 of its 25 focus markets. Those 21 current markets are: Atlanta, Baltimore/Washington, Chicago, Cincinnati/Louisville, Dallas/Fort Worth, Denver, Detroit, Harrisburg/Central Pennsylvania, Houston, Indianapolis, Los Angeles, Milwaukee, Minneapolis, Nashville, Northern New Jersey, Philadelphia, Phoenix, Portland, Salt Lake City, St. Louis, and Tampa. As noted, the company plans to eventually enter four new markets: Miami, San Diego, San Francisco, and Seattle.

First Industrial said it will increase its holdings in its 25 target markets by selling its properties in the following eight markets: Cleveland, Columbus, Dayton, Des Moines, Grand Rapids, Hartford, Long Island, and New Orleans/Baton Rouge. The company estimates the market value of its real estate assets in these eight markets at $450 to $500 million. Brennan said that "the divestiture from these markets is anticipated to be completed in 18 to 24 months."

First Industrial recently figured in the news when it was disclosed the company was named as a "stock tip" in a 20-year-old wallet auctioned for charity by Berkshire Hathaway’s Warren Buffett. The news sent the company’s stock price soaring by roughly 7 percent on December 17.

Share Repurchases as a Percentage of Equity Market Cap   % of Shares Outstanding Authorized (1) % of Shares Outstanding Completed (2) Apartment REITs Archstone 5.2% 3.4% Camden Properties 15.7% 8.3% Equity Residential 1.7% 1.6% Essex Property Trust 2.4% 1.3% Gables Residential 12.5% 4.3% Mid-America Apt Communities 4.6% 2.7% Summit Properties 8.1% 5.3% United Dominion Realty 4.4% 1.8% Neighborhood Shopping Ctr REITs Developers Diversified 26.4% 2.3% JDN Realty 9.0% - New Plan Excel 4.6% - Regional Mall REITs JP Realty 6.9% - Macerich 2.2% - Rouse 4.4% - Factory Outlet REITs Tanger Factory 1.9% 0.5% Office/Industrial REITs Bradywine Realty Trust 4.4% 1.2% Crescent Real Estate 21.4% - Mack-Cali 5.5% 2.4% Reckson Associates 4.4% - TrizecHahn - 1.6% Self-Storage REITs Public Storage 7.7% 3.6% Sovran Self Storage 7.5% 0.9% Manufactured Home REITs Manufactured Home Communities 11.5% 8.4% Sun Communities 5.0% - Triple Net Lease REITs National Golf Corp 4.4% 1.1% US Restaurant Prop. 2.3% 0.6% Mixed Use REITs/ Miscellaneous Catellus Development Corp 3.5% - Colonial Properties 16.5% 10.4% Cousins Properties 3.1% 0.1% Forest City 1.7% - St. Joe Corporation 7.5% 5.3% Security Capital Group 2.8% 1.1% Security Capital US Realty 18.1% 10.5% Hotel REITs FelCor Lodging Trust 7.7% - Host Marriott 6.7% 0.2% MeriStar Hospitality 8.7%   (1) As of 11/15/99 (2) As of 9/30/99 Source: Merrill Lynch & Co.

Highwoods Announces Share Buyback
Highwoods Properties recently became the latest in a growing list of publicly traded property companies to announce a share buyback. In a prepared statement, the Raleigh, North, Carolina REIT announced its board of directors had authorized the repurchase of up to 10 million shares of its current 71.1 million outstanding common shares and operating partnership units through periodic open market or privately negotiated transactions.

"The after-tax proceeds from our portfolio repositioning efforts including proceeds from sales currently under contract, along with internally generated cash flow, will be used to fund our development pipeline, repay outstanding indebtedness, and repurchase shares of our common stock," said Ron Gibson, Highwoods’ president and CEO. He added, "This strategy is designed to improve our funds from operations growth rate without adversely affecting our debt ratios."

The announcement puts to rest speculation that the company was considering a management-led buyout (see "Highwoods Mulls an MBO," Property, November/Dec-ember 1999, page 6). Industry sources told Property that after coming close to doing a buyout, the plan was abandoned at least for now because of market conditions, including financing considerations.

According to a recent report by Eric Hemel, who heads the REIT research effort at Merrill Lynch & Co., and his colleagues, as of mid-November 1999, 36 of the 80 companies in their $120 billion equity market cap coverage universe had authorized $3.6 billion of share repurchases. (The Highwoods announcement was made after Hemel’s report was released.) The Merrill analysts added that as of the end of the third quarter of 1999, the average completion percentage of share buybacks, which had been in place for more than several weeks, was 67 percent (see table on this page).

Highwoods owns or has an interest in 704 office, industrial, retail, and service center properties encompassing approximately 50.1 million square feet, including 44 development projects encompassing approximately 5.4 million square feet and 2,321 apartment units. The company also controls more than 2,100 acres of development land. Highwoods’ properties and development land are located in Florida, Georgia, Iowa, Kansas, Missouri, North Carolina, South Carolina, Tennessee, and Virginia.

People & Places

AMB Property Corp. Shuffles the Deck … T. Robert Burke, AMB’s chairman and one of its three founders, retired at the end of 1999. Burke will remain a director of the company and become chairman of the board’s executive committee. Hamid R. Moghadam will become chairman of the San Francisco-based company’s board. (He was already the company’s CEO.) W. Blake Baird, currently chief investment officer, will become president, a position previously held by Moghadam.

Volk Gets New Post at FFCA … Christopher H. Volk became president of Scottsdale, Arizona-based Franchise Finance Corp. of America on January 1, 2000. Volk also will continue to serve as the company’s chief operating officer. Morton H. Fleischer will remain FFCA’s chairman and CEO.

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