[WEEKLY REAL ESTATE REPORT ARCHIVES]

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)
and William Campbell (WGCAMP)

Boston, MA (Mar. 10, 1997) -- It has been a pretty busy week for REITsters, and MF Foitdog was looking forward to loading up on the latest gossip as he reached for the shiny brass handle on the mahogany door at MF Yorick's drinking and real estate discussion establishment. Through the cut glass window Foitdog could see Yorick the friendly bartender doing magical things with his sterling Tiffany cocktail shaker. At the end of the bar WGCAMP was holding forth in an elegant blue suit. Camm Morton was in the corner throwing darts at the REIT dividend board. Camm was wearing no tie, and his Phillip Van Heusen shirt was unbuttoned. Did someone say Phillip Van Heusen took the shirt off FAC REALTY's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FAC)") else Response.Write("(NYSE: FAC)") end if %> back? Well, to be fair that was before Camm arrived.

A handsome masked man who looked a bit like a well-know REIT journalist was sitting at a table not too near the band. As Foitdog approached, Yorick, the nimble-fingered bartender, asked, "Did you notice that beautiful yellow Bentley Turbo RManton parked out front? He claims he earned it by doing weird and wonderful things with spreadsheets."

"No way," barked Foitdog, "I hear that he simply cashed a couple of those dividend checks that he normally leaves in HOME PROPERTIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE:HME)") else Response.Write("(NYSE:HME)") end if %> Drip Plan."

Yorick grinned. "He does have a crush on that stock, but you have to admit Home Properties is intriguing. The company made a coherent presentation in at the NatWest conference in Palm Beach. Personally, I'm more comfortable with middle market apartment REITs like Home Properties, which attract elderly tenants in slower-growth communities, than I am with top-of-the-line apartment REITs in big-growth communities competing for the 'renters by choice.' But, Foitdog, answer another question, if you will. Is it true that your favorite drink, the Goombay Smash, is named after that parrot you carry on your shoulder?"

"Well," Foitdog replied, "Truth told, I bought Goomie the parrot in Nassau the same day I had my first Goombay Smash. I'd been doing an off-shore deal with some of those real pirates from Nassau's Bay Street banks and I figured I needed both a parrot AND a cutlass to protect myself."

"Speaking of knights of the Spanish Main," Yorick said, "Who do you think will win the battle between Bernie Mendik and VORNADO REALTY TRUST <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VNO)") else Response.Write("(NYSE: VNO)") end if %>? I've never seen Mendik leave any serious money on the table and I don't think that Steve Roth is paying Michael Fascitelli a $35 million plus signing bonus to overpay for properties."

"Office pricing right now is an interesting question," Foitdog noted, feeding his parrot a pretzel. "There are expected to be over $5 billion worth of office-related REIT IPOs dumped on the unsuspecting dear public this year. That would blow the doors off the $700 million of office REIT offerings last year. And it would all be in eight deals. All from large metropolitan office landlords.

"I hear rumors of deals from Sam Zell, Ed Linde and Mort Zuckerman, Paul Nussbaum, and the ever-popular Bernie Mendik, though that deal is taking an interesting turn. Those IPOs range from Chicago to Boston to Dallas to New York.

"When you see the sheckels raked in so far by the insiders at in the BEACON PROPERTIES CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BCN)") else Response.Write("(NYSE: BCN)") end if %>, CRESCENT REAL ESTATE EQUITIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CEI)") else Response.Write("(NYSE: CEI)") end if %>, and SPIEKER PROPERTIES INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SPK)") else Response.Write("(NYSE: SPK)") end if %>, it's no surprise that Zell and his guys are about to exchange their private office holdings for public shares. I wonder if there's enough capital to slop all this up? But then you watch Vornado make a move on Mendik, and Nussbaum (a hotel REIT magnate) make a move on Chubb Insurance's $1.8 billion office portfolio and you almost have to wonder if there will be any non-office REITs left by 1999. And how cheaply will Mendik or Chubb sell? They can read the prices these things are going for in The New Yorick Times as well as we can."

WGCAMP ordered his second Beefeater's and Stoli martini with a splash of Lillet (the real James Bond Martini, shaken not stirred) and replied, "I understand the world's best-known REIT journalist (Barry V) doesn't think that the real 'New Era REIT' guys like Roth and Fascitelli can afford to make a deal at below the market because it would kill their reputations as big-time deal makers. If they lose that they could also kill their extraordinary high multiple.

"Decide for yourself if they are top dollar properties. You can look at the properties that might be a Mendik IPO -- or otherwise might be acquired by Vornado -- by clicking on this hypertext:

The Mendik Company

"I don't think Vornado has a web site, but you can find out something about the company at:

MARKET GUIDE SNAPSHOT FOR Vornado Realty Trust.

"Speaking of huge, did anyone notice that Crescent filed a $1.2 billion shelf offering for preferred shares, common shares and warrants?" asked Foitdog as he woofed down a handful of hors d'oeuvres, fed one to the parrot, and simultaneously reached for his third Goombay Smash. "That's a lot of change to leave loose on the bureau. The company must be buying something. And isn't it disgraceful how Chubb abandoned the concept of holding onto direct property investment? Chubb is selling the Bellemeade Development for some $1.8 billion to Nussbaum, or maybe just BCN. Despite all this hot office pricing and investor interest I hear Chubb will still have to write off $160 million on Bellemeade."

"It looks like the market almost bailed the company out this time," said Yorick. "Funny though, how the appraisals never caused Chubb any problems when the market was really lousy. Now, in the hottest real estate market in 10 years, they are still off by ten percent. But safety, which to them means a low beta, is supposed to be one of the major benefits of direct ownership. How do you measure beta when your speedometer is off by 10% while you are standing still?"

An erudite young man in Mr. Peepers spectacles and a yellow and black hound's-tooth sport coat, asked for a sasparilla. He said: "If you are interested in New Era thinking, what do you think about FEDERAL REALTY INVESTMENT TRUST's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FRT)") else Response.Write("(NYSE: FRT)") end if %> acquisition of Town & Country Village in San Jose, California, for $42 million in cash? Federal says it plans to redevelop the property over the next 18 to 30 months into a Main Street retail district and a master-planned residential community. Federal has formed a limited liability company, FRIT San Jose Town & Country LLC, and a beneficial taxable unit, San Jose Residential Inc., to take part in the redevelopment."

"Sounds like New Airhead thinking to me," growled Foitdog. "Up until now, Federal operated about 74 shopping centers and one lonely apartment house all in the mid-Atlantic region. I agree that San Jose is one of Silicon Valley's most prime retail locations, but it is only 74% leased. These are not the same type of Silicone Valley locations the boys in the nation's capital have learned to love. "

The silver-haired WGCAMP reached for the pretzels and asked, "Can you believe Donald Duck, Mickey Mouse, Bear Stearns and the folks that brought you Bhopal have joined together to bring us stepped-down preferred stock? That's right folks, the WALT DISNEY CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DIS)") else Response.Write("(NYSE: DIS)") end if %> folks have joined Warner Brothers. These are not dogs or gazelles, they have all turned into Porky the Pig. Bear Stearns and others have placed about $10 billion of that fine preferred stock in the last few months and have garnered fees in the $200 million plus range. No wonder they are so seriously concerned that the whistle's been blown. I just hope they haven't blown the whole REIT tax deduction for everyone."

"Funny," Yorick laughed, "I'd have thought Michael Ovitz's severance package would've provided Disney all of the tax deductions the company would ever need. And I hear Bear Stearns and some of those rapscallions intend to hang on for dear life and fight the Treasury. I even hear they may well win; no matter how much it endangers normal REIT tax benefits. These stepped-down preferreds front load the dividend, something that no real REIT could afford to do in the marketplace. They effectively allow participating companies such as UNION CARBIDE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UK)") else Response.Write("(NYSE: UK)") end if %>, Disney and others to deduct a substantial portion of their principal payments. The stated rate was normally 100 basis points over the treasury but the after tax rate was often closer to 1%. Hard to think the Treasury would stand still for that."

"How do they get around the five people and 50% ownership rules?" asked RBCan, a noted lawyer and recovering tax benefit junkie.

"Easy," WGCAMP replied, reaching for the beer nuts. "While REITs have to have 100 shareholders, the ownership rules look through the corporation to its shareholders. That's the same rule that allowed San Zell's REIT to tender for CHATEAU PROPERTIES INC <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPJ)") else Response.Write("(NYSE: CPJ)") end if %>. I like Disney but these Mickey Mouse deals may be the end of us yet. Enough about that, what do you think about the change of command at Horizon?"

Yorick grimaced. "Cheryl MacArthur returning to Horizon is probably the best idea since General Custer decided to help out the native American population at Little Big Horn. If she's really returning to a management slot at Horizon she will be about as welcome on Wall Street as Douglas MacArthur's returning to Corregidor was at Imperial Japanese HQ. She didn't exactly endear herself to investors with her last performance.

"Speaking of ideas that make me shake my head in wonder, think about this. I hear major pension funds are buying into the more liquid REIT sector today, BUT they are also being pushed to get into riskier, new development direct investment projects to maintain the yields they've projected for themselves on real estate assets.

"One real problem with institutions investing in real estate has been that their capital has been allocated kind of like Santa Claus's presents. Some committee looks at who's been naughty and nice in the last year and doles out next year's investment capital pretty much on that basis. But the market changes quickly enough so that in order to get forecast returns, the asset managers often find they have to take greater than expected risks. Problem is nobody's bonus gets raised for calling the advisor and saying, "No thanks, why don't you take this allocation back. I just can't spend it and get you the risks and returns we agreed on." So they do one of two things: either they make the projections based on more optimistic assumptions of return, or they take on more risk. I've seen this movie several times before. The ending was never happy."

"Maybe it's true there's too much development money out there," said the guy with Mr. Peepers' glasses. "But as far as I can see, real estate development is still declining. McGraw-Hill reported January construction contracting volume down 1.6% from the month before, to an annual rate of $303.63 billion. Then the Dodge new-construction index dropped from 122 in December to 120 in January. Looks to me like the last year-end slow-down is still continuing. Residential construction was off 3.9% in January. The big drop was out West and the big gain (6%) was in the South Atlantic region. Nonresidential building volume dropped 4.2%.

"That pension investment in riskier development stuff you are worried about may be a cloud on the horizon, but it looks pretty far away to me. I see in the last quarter of 1996 that overall vacancies of five-or-more unit multi-family structures hit 9.4%, down two-tenths of a point from a year ago. If that trend continues a few more quarters we could be down to where higher-than-CPI rent raises are in the cards in a lot of markets."

"There's for sure plenty of money to buy existing apartments," WGCAMP chimed in. "By this summer, EQUITY RESIDENTIAL PROPERTY TRUST <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EQR)") else Response.Write("(NYSE: EQR)") end if %> forecasts the company will own at least 100,000 apartment units. In the remainder of this year, Equity expects to pick up another 10,000 to 15,000 units. That would bring Equity's overall market capitalization to somewhere above the $6 billion mark.

"That's pretty astonishing. In 1990, about $6 billion would have bought you every share of every publicly traded REIT in America. And I believe that a lot of the reason REITs sell at above private market "net asset values" is that in the brave new world they can often borrow 150 basis points or so cheaper than private investors. That extra cash flow has to go somewhere, and what it does is increase the value of a big well-financed REIT's equity position. These huge companies have an extra leverage that small guys just can't match. The multi-family business is looking more and more like a commodity industry where the efficient low-cost producers pick up all the marbles worth playing with. In apartments the cost of capital is far and away the biggest cost. Cheap money talks."

"I don't worry nearly as much about whether the public's money is flowing in to stocks as I do about management's," Yorick said, while polishing martini glasses. "Did anyone notice that insiders have bought 426,000 shares of PROMUS HOTEL CORPORATION <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PRH)") else Response.Write("(NYSE: PRH)") end if %> stock in the last 180 days? That's management snarfing up stock that today is worth in the ritzy neighborhood of $14,910,000. Promus doesn't manage the Ritz, but it sure does manage and franchise Embassy Suites, Hampton Inns, and Homewood Suites hotels. The company has been hanging on to a 73% occupancy rate for its 107,000 rooms, compared to an industry-wide occupancy rate of 65%.

"But they isn't the only guys adding to hotel investments. Marriott has inaugurated a new Marriott Executive Residence chain for extended-stay executives. The chain will be focused in Eastern Europe and the Far East starting in Budapest, but in this country, New York, Miami, and San Francisco are likely sites. And if you thought far away places and new hotels was the only game in town, check out PATRIOT AMERICAN HOSPITALITY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PAH)") else Response.Write("(NYSE: PAH)") end if %>, which just bought $46 million worth of historic hotels. Lots of them are in truly secondary markets. I am beginning to have a little less confidence in the assets the hotel REIT income streams are built on when they are no longer triple-star hotels in three-star markets but instead are in development deals or in third-tier markets. But what does a bartender know anyway?"

"What indeed?" Foitdog thought, as he picked up his parrot and headed to the door. "What indeed could a bartender know about real estate?" The door swung shut behind him.

Respectfully,

MF Yorick

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 into Yorick's some night. And frankly we want to know what you think.

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By MF Yorick and MF Foitdog and WGCAMP for The Motley Fool Real Estate Board but all the errors are the fault of MF Yorick.