San Diego Business Journal

Two San Diego County retail real estate investment trusts have good third-quarter news for their shareholders as a third company proceeds with liquidation.

One REIT industry analyst sees the current high U.S. interest rate environment as causing a shakeout in the industry.

Pan Pacific Retail Properties Inc. of Vista earlier this month reported it had successfully acquired Western Property Trust, a publicly traded REIT based in the Sacramento-San Francisco area that owned 50 strip shopping centers in northern California.

In a stock-for-stock transaction, Western Property Trust shareholders received 0.62 shares of Pan Pacific, which is publicly traded on the New York Stock Exchange under the symbol PNP, for each share of Western they owned.

The $440 million merger created the largest West Coast neighborhood shopping center company with a total market capitalization of $1.3 billion. That fact will make it easier and cheaper for Pan Pacific to borrow money to fund new acquisitions, said Stuart Tanz, president and CEO.

The move drew praise from an analyst who follows the REIT industry.

"I think PNP remains one of the strongest community shopping center REITs in the 25-stock sector," said Richard C. Moore, first vice president at McDonald Investments Inc., a Cleveland stock brokerage. "It is now bigger with the Western acquisition, but every bit as conservative as before with its balance sheet."

Moore, who specializes in following the REIT industry, said it now appears electronic retailers won't pose a threat to bricks-and-mortar establishments beyond the threat that catalog retailers present.

"Ironically, the e-tailing threat spurred the brick-and-mortar management teams into action, and now they are using technology far more effectively than their virtual counterparts," Moore said.

Growth Spurt

Early this year, Pan Pacific took an equity share in Eversave.com, a Web hosting service that allows Pan Pacific's small retail tenants to have an advertising presence on the Internet.

Pan Pacific said its funds from operation increased 9.5 percent to $14.1 million for the third quarter, when compared to the third quarter of 1999. Funds from operation is a measure of cash flow used by the REIT industry that excludes depreciation and interest charges, among other things.

In addition to the merger with Western, Pan Pacific also acquired two grocery-anchored shopping centers for $25.7 million. One is in Anaheim, the other in Valencia, Tanz said.

Escondido-based Realty Income Corp., traded under the symbol O on the New York Stock Exchange, said earlier this month it had increased its monthly dividend for the 12th consecutive quarter. The monthly common stock dividend was increased to 18.38 cents per share from 18.25 cents per share, said Tom Lewis, CEO.

At its current trading price of approximately $23.75 a share, the dividend yield is approximately 9.26 percent per year.

During the third quarter, Realty Income invested $28 million in eight new properties. The company owns mainly single-tenant retail buildings leased to chain store tenants, Lewis said.

Reaching Its Peak

On Aug. 21, Salomon Smith Barney downgraded the stock from an "outperform" to a "neutral" because it had already risen nearly 25 percent year-to-date, said Ross Nusbaum, the real estate stock analyst who shifted the company's status. Realty Income was also hit earlier this year by the bankruptcy of a tenant, Flooring America, which rented 16 of the local company's single-tenant properties.

Moore doesn't do formal research on Realty Income but is familiar with the company.

"That company has done real well with triple net leases on its retail properties," Moore said. "But because the leases are long-term, usually 15 years or so with fixed rents, the company can get hit when borrowing costs increase because interest rates rise."

He said the main attraction of Realty Income is the company's monthly dividend payments. That appeals to a lot of retired investors looking for steady income and the hedge against inflation that real estate provides, he said.

Meanwhile, Burnham Pacific Properties Inc., whose board of directors in August voted to liquidate and sell all of its shopping centers, reported a drop in third-quarter income.

The company's funds from operation for the third quarter were a negative $1.1 million, or a 4-cent per share loss, compared to a $7.3 million or 23-cent per share gain in third quarter 1999.

The company trades on the New York Stock Exchange under the symbol BPP and this past week was selling for about $5 a share, down from a 52-week high of $11.

Management Style

"The year-over-year decline in funds from operation was primarily attributable to lower revenues resulting from asset sales, decrease in lease termination fees and management fee income, and an increase in borrowing costs," said Daniel B. Platt, CFO. "We anticipate that the foregoing dilutive effects will continue to impact the company's operating results."

Moore said he wouldn't buy Burnham stock right now. He cited the company's troubled history under its former president, J. David Martin, who resigned in August, as one of the reasons its stock price fell.

"The management didn't give shareholders a fair shake," Moore said. "What you're seeing for the first time in the REIT industry the past couple years is a divergence between those who really know how to operate properties and those who don't."

Moore said in the past, investors were more concerned about the sector a company was in, such as office, industrial or apartments, than they were in its individual financial fundamentals.

"What you're seeing now is some REITs really know how to make money and some don't," Moore said.

Platt responded by saying: "To the best of my knowledge, Mr. Moore has never covered Burnham Pacific Properties, nor has he spent any time learning about Burnham from us. If senior management leaving is a management problem, then we had a management problem, otherwise I don't know what our other management problems might be."

Platt added that a lot of positive things have happened to Burnham in the past 90 days. Two San Diego County retail real estate investment trusts have good third-quarter news for their shareholders as a third company proceeds with liquidation.

Platt added that a lot of positive things have happened to Burnham in the past 90 days.Two San Diego County retail real estate investment trusts have good third-quarter news for their shareholders as a third company proceeds with liquidation.

One REIT industry analyst sees the current high U.S. interest rate environment as causing a shakeout in the industry.

Pan Pacific Retail Properties Inc. of Vista earlier this month reported it had successfully acquired Western Property Trust, a publicly traded REIT based in the Sacramento-San Francisco area that owned 50 strip shopping centers in northern California.

In a stock-for-stock transaction, Western Property Trust shareholders received 0.62 shares of Pan Pacific, which is publicly traded on the New York Stock Exchange under the symbol PNP, for each share of Western they owned.

The $440 million merger created the largest West Coast neighborhood shopping center company with a total market capitalization of $1.3 billion. That fact will make it easier and cheaper for Pan Pacific to borrow money to fund new acquisitions, said Stuart Tanz, president and CEO.

The move drew praise from an analyst who follows the REIT industry.

"I think PNP remains one of the strongest community shopping center REITs in the 25-stock sector," said Richard C. Moore, first vice president at McDonald Investments Inc., a Cleveland stock brokerage. "It is now bigger with the Western acquisition, but every bit as conservative as before with its balance sheet."

Moore, who specializes in following the REIT industry, said it now appears electronic retailers won't pose a threat to bricks-and-mortar establishments beyond the threat that catalog retailers present.

"Ironically, the e-tailing threat spurred the brick-and-mortar management teams into action, and now they are using technology far more effectively than their virtual counterparts," Moore said.

Growth Spurt

Early this year, Pan Pacific took an equity share in Eversave.com, a Web hosting service that allows Pan Pacific's small retail tenants to have an advertising presence on the Internet.

Pan Pacific said its funds from operation increased 9.5 percent to $14.1 million for the third quarter, when compared to the third quarter of 1999. Funds from operation is a measure of cash flow used by the REIT industry that excludes depreciation and interest charges, among other things.

In addition to the merger with Western, Pan Pacific also acquired two grocery-anchored shopping centers for $25.7 million. One is in Anaheim, the other in Valencia, Tanz said.

Escondido-based Realty Income Corp., traded under the symbol O on the New York Stock Exchange, said earlier this month it had increased its monthly dividend for the 12th consecutive quarter. The monthly common stock dividend was increased to 18.38 cents per share from 18.25 cents per share, said Tom Lewis, CEO.

At its current trading price of approximately $23.75 a share, the dividend yield is approximately 9.26 percent per year.

During the third quarter, Realty Income invested $28 million in eight new properties. The company owns mainly single-tenant retail buildings leased to chain store tenants, Lewis said.

Reaching Its Peak

On Aug. 21, Salomon Smith Barney downgraded the stock from an "outperform" to a "neutral" because it had already risen nearly 25 percent year-to-date, said Ross Nusbaum, the real estate stock analyst who shifted the company's status. Realty Income was also hit earlier this year by the bankruptcy of a tenant, Flooring America, which rented 16 of the local company's single-tenant properties.

Moore doesn't do formal research on Realty Income but is familiar with the company.

"That company has done real well with triple net leases on its retail properties," Moore said. "But because the leases are long-term, usually 15 years or so with fixed rents, the company can get hit when borrowing costs increase because interest rates rise."

He said the main attraction of Realty Income is the company's monthly dividend payments. That appeals to a lot of retired investors looking for steady income and the hedge against inflation that real estate provides, he said.

Meanwhile, Burnham Pacific Properties Inc., whose board of directors in August voted to liquidate and sell all of its shopping centers, reported a drop in third-quarter income.

The company's funds from operation for the third quarter were a negative $1.1 million, or a 4-cent per share loss, compared to a $7.3 million or 23-cent per share gain in third quarter 1999.

The company trades on the New York Stock Exchange under the symbol BPP and this past week was selling for about $5 a share, down from a 52-week high of $11.

Management Style

"The year-over-year decline in funds from operation was primarily attributable to lower revenues resulting from asset sales, decrease in lease termination fees and management fee income, and an increase in borrowing costs," said Daniel B. Platt, CFO. "We anticipate that the foregoing dilutive effects will continue to impact the company's operating results."

Moore said he wouldn't buy Burnham stock right now. He cited the company's troubled history under its former president, J. David Martin, who resigned in August, as one of the reasons its stock price fell.

"The management didn't give shareholders a fair shake," Moore said. "What you're seeing for the first time in the REIT industry the past couple years is a divergence between those who really know how to operate properties and those who don't."

Moore said in the past, investors were more concerned about the sector a company was in, such as office, industrial or apartments, than they were in its individual financial fundamentals.

"What you're seeing now is some REITs really know how to make money and some don't," Moore said.

Platt responded by saying: "To the best of my knowledge, Mr. Moore has never covered Burnham Pacific Properties, nor has he spent any time learning about Burnham from us. If senior management leaving is a management problem, then we had a management problem, otherwise I don't know what our other management problems might be."

Platt added that a lot of positive things have happened to Burnham in the past 90 days.