The Weekend Real Estate Update at
MF Yorick's Bar, Grill, and
Real Estate Conversation Society
(Service for Members Only)

By Michael Dowd (MF Yorick)
and Jerry Scott (MF Foitdog)

BOSTON, MA (Feb. 22, 1997) -- When the weekend comes, the ticker stops clicking, and the Bloomberg machines stop chattering. MF Foitdog usually pauses on his way home from the office for a libation at MF Yorick's Bar, Grill, and Real Estate Conversation Society (Service for Members Only). MF Foitdog is a bit of a workaholic, so he needs a place to taper off from a hard week of REITing.

Tonight after a really long stretch in the REIT trenches, Foitdog reached extra gratefully for the shiny brass handle on the mahogany door. He glanced through the cut glass window and saw a number of the regulars had already arrived. REIT prospectuses, spreadsheets and bootleg Xerox copies of Green Street reports were lying on tables. A number of portfolio managers and investors, while not lying exactly around the tables were at least stretching the truth a bit. "Did none of these guys buy FAC at the IPO?" Foitdog mused to himself. "What will the FAC dividend cut mean? Could every last one of these wise guys possibly have bought Beacon Properties back when it was $19? Should I sell it now? Maybe I need to be better informed."

"So," Yorick the bartender said to Foitdog after pouring his traditional Goombay Smash, "What did you think about CleveTrust?" Foitdog remembered that on Thursday of this week John C. Kikol, Chairman and President of CleveTrust Realty Investors <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: CTRIS)") else Response.Write("(NASDAQ: CTRIS)") end if %>, today that the Trust, some of its major shareholders of the Trust, and a Texas company named RM Crowe Company had signed a letter of intent that says that RMC, the Trust, the big shareholders intend to buy CleveTrust for $6.42 per share, in cash. CTRIS was around $4.50 eight months ago, so from there to $6.42 has been quite a ride for a sleepy REIT.

" I think it will only be the first of a series of small REIT takeovers, Foitdog said, sipping at his Goombay Smash. I am pretty sure this acquisition will go through, the Trustees and their family members control about 70% of the stock. My question is which of the other small REITs will go next?"

"Do you really think there will be more mergers like this?" Yorick asked.

"Good chance," Foitdog responded, "The big Wall Street houses like IPO deals with a minimum of about a $300 million market cap, and lots of good companies just can't gather enough property for an IPO that size. If you want to go public, one quick way is to buy a small cap REIT without too many troubles and stick your own properties in it in exchange for shares."

"Interesting," Yorick replied, then he turned to a handsome silver-haired man in a blue suit, sipping a single malt scotch. "What happened in real estate this week that you found interesting?" he asked the man.

" What intrigued me this week was that Health and Retirement Properties Trust announced it would buy << a 30-building portfolio of government-leased office space from Government Property Investors Inc. for $446 million. The properties are scattered in various markets across the country, although over half of the portfolio's value is positioned in Washington DC. The seller is a private company controlled by two investment firms -- Rosecliff Inc. and Brown Brothers Harriman.

"I was intrigued that in a world where Wall Street wants REITs with a narrow product type focus, a nursing home REIT would take this big a leap. Is it because they fear the future of health-related real estate in a climate of Federal budget-balancing? Is it just because health care REITs have done so badly in comparison with other REITs this last year? And if they are afraid of massive budget cutting, how much protection do they get from having 25% of their $1.7 billion in property concentrated in a bunch of buildings leased to the Feds, half of them in DC?"

"Good question, Yorick replied. "I should go onto AOL and ask it on the Motley Fool real estate message board."

"Well," the silver haired gentleman continued, "If you don't like mixed-property mergers, how about Simon DeBartolo getting a 79% kick in its FFO ("Funds From Operations") after Simon picked up the DeBartolo REIT this year? While you are on The Motley Fool Real Estate message board why don't you ask about that, too? Is it true what young Mr. Simon says? Is Simon DeBartolo so big it can actually get better terms from an anchor tenant than a smaller landlord of regional malls? I know they are big, but can they possibly have that much clout?"

Yorick pondered that question as he poured the silver haired gentleman another single malt 'on the house, sir' and asked: "Did anyone read the article on Mortimer Zuckerman's potential new office REIT in the latest Business Week?" They say if Zuckerman does take his property empire public the deal would be in the $400 million range. BW noted << The $400 million-plus raised by an offering would likely go toward expanding the company's holdings, which currently total 12 million square feet. The majority of Zuckerman's holdings are in well-located, Class-A office space within New York, Boston, and Washington markets. >>

"Last year it seemed that every other REIT IPO was a hotel REIT. This year it looks like they will almost all be office REITs. There've been two recent ones in California, several are being talked about in New York.

"Other REITs are focusing more on offices, Spieker Properties Inc. announced plans to sell off 13 shopping centers, raise the $180 million, and beg borrow or do a secondary. Then Spieker is ready to pay $332.5 million to buy eight suburban West Coast office properties.

"Meanwhile back at the ranch, Sam Zell is hinting about converting his office partnerships into about a $2.5 Billion office REIT. The potential New York, California and Zell REITs alone have the potential to about double the total market cap of the US office REITs. Then there's the World Trade Center.

"That's not all, a while ago J.P. Morgan Securities was asked by the Port Authority of New York to study the sale prospects of the World Trade Center. Morgan says the property could bring in up to $1.2 billion in a near-term deal. Then there's the gonzo unconfirmed rumor that a new Rockefeller Center REIT may be in the making, though I can't believe anyone would be that brazen while Mitsubishi is still binding up its wounds from the last debacle.

"Speaking of the former Rocky Horror Show, one of the principals in turning Rock Center around is Tishman Speyer's Jerry Speyer. His plan is to work with Travelers Group in a joint venture to acquire a total of 10 office buildings. Rumor hath, that's the opening gambit for a sale of an equity position in the whole pooled portfolio. Both on the Motley Fool and elsewhere, observers this week commented they thought the portfolio would likely be converted into a real estate investment trust and large pieces sold to public or private investors. Boston real estate officials are referring to the new pool as a so-called "incubator REIT." The Boston Globe quotes Spaulding & Slye President James Karman as saying "It's not a secret that Travelers has been trying to figure out a way to divest its real estate holdings for some time."

"Only a year or so ago, institutional advisors were still suggesting that the future paradigm for institutional real estate investors would continue to include a major portion of direct equity investment. It was frequently advocated as part of the "four quadrant" theory for real estate investment. Announcements such as these by Travellers suggest that for whatever reason many, probably most institutions are getting out of their direct investments -- or reducing their exposure dramatically. Hey, Yorick, my throat's dry, but I'll tell you one thing: if only half all this office stuff happens, you gotta wonder where will the investors to buy it all come from?"

"You didn't have to be a REIT to have been in the real estate news this week," Foitdog smiled. "You could be a plain old "C-Corp. Look at Hilton making a hostile takeover bid for ITT. The conventional wisdom used to be that real estate is 'location, location, location,' I figure you'd have made more money if you said 'Bollenbach, Bollenbach, Bollenbach.' Debt holders may not love Bollenbach after the initial hosing they got in the Marriott split up, but gee whiz he's been good for some private owners. He rescued Trump. He's been pretty good for some public shareholders too... Marriott, Disney, and just look at the Hilton chart since he got there."

"Fortune quoted Montgomery Securities analyst Michael Mueller this week as saying << anyone who had invested a single dollar in Bollenbach's employers beginning in 1982 and moved that money every time Bollenbach switched jobs would have just shy of $40 today, amounting to an annual growth rate of nearly 28 percent. >>

"Hey, all!" said a loud checked sport jacket striding into the bar. "How about a draft Guinness? And what did you think of Apartment Investment & Management Company's proposed merger with NHP Inc. (NHPI). NHP is one of the country's largest multi family property managers, and bears the distinction of once having been one of Warren Buffett's less terrific scores. Apartment Investment takes control in a complex deal. It will acquire an ownership interest (often a General Partner interest) in the new properties it will be managing as well buying the management business.

"There are tax reasons for AIV wanting to own the GP interests in the underlying properties AIV is a real estate investment trust. AIV could lose its REIT exemption from corporate tax by managing too many properties in which it doesn't have an ownership stake.

"There's a less benign reason too, though. When a GP owns a management company and gets most of its compensation from management fees, it has no incentive to sell the property even if that is in the Limited Partners' interest. Many of NHP's properties are subsidized housing. It may well be in the Limited Partners' interest to sell them, but not the GPs'. This kind of conflict is exactly what most modern REITs try to avoid. Let's hope the LPs in the NHP deal come out OK. It's another big dollar deal. Some analysts say the equity part of the deal with NHP's public entity alone is worth about $295 million. NHP's shares went up almost 30% on the announcement. Apartment Investment's shares slipped 1.4%. Well, you can't ever make everyone happy."

"I don't call that a big deal," the silver haired gent said, pointing to his glass which Yorick promptly refilled. "Did you see Marriott will buy the Renaissance Hotel Group for $1 billion. It is a big step toward Marriott's announced goal of adding 120,000 rooms by the year 2000. By itself, the Renaissance deal will double Marriott's room count to 54,000.

"So what else occurred in the sleepy world of real estate this week?" the handsome silver haired gent asked while settling up his bar tab.

"Not much, Bill" Yorick replied, "other than that it was pretty quiet."

"G'night, then," WGCAMP replied. "See you here next week. Maybe something will happen to liven things up a bit."

NOTE TO NEW READERS: MF Yorick's bar is down a quiet side street in a major metropolitan area. There's no big sign outside and it can be a little hard to find. Not every stock in real estate gets discussed every week at Yorick's, and not even every important development in the industry. But we want to know what real estate stocks and topics you'd talk about if you wandered in to Yorick's some night. And frankly want to know what you think.

So if you have suggestions or comments just E-mail them to MF Yorick. He's easy to find. Just click on this blue hypertext and you'll be talking to the friendly corner bartender at MF Yorick's Bar, Grill, and Real Estate Conversation Society (Service for Members Only).

(By) MF Yorick and MF Foitdog for The Motley Fool Real Estate Board