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DEAL OF THE MONTH

Burnham Pacific Properties, in partnership with California Public Employees Retirement System (CalPERS), said it would buy 38 shopping centers from AMB Property Corp. for $633 million. The deal, expected to close in stages throughout the year, expands the San Diego REIT's portfolio from seven to 15 states, said Burnham Chief Investment Officer Jim Gaube. The firm's exclusive partnership with CalPERS gave it an edge against others that may have been eyeing AMB, a San Francisco-based REIT that said it would shed its retail holdings to concentrate on industrial properties.

Konover nabs Fla. management team

With an eye on future center acquisitions, Konover Property Trust said it would take over RMC Realty Cos., a Tampa, Fla.-based leasing and management firm responsible for 7.2 million square feet in 72 neighborhood and community centers throughout Florida. Terms were not disclosed. Konover, Cary, N.C., said it would operate RMC as a subsidiary. "If retailers are going to lease space in Florida, they'll likely have to talk to us," Konover CEO C. Cammack Morton said. "We firmly believe in the value of managing properties that have strong potential for future purchase to help us gain market dominance."

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Prime Capital, Horizon nix merger

Citing possible changes in tax laws, New York real estate firm Prime Capital Holding has withdrawn its previously announced plan to merge with Chicago-based outlet REIT Horizon Group Properties. The merger had drawn criticism from some industry analysts, who suggested the proposal was a form of "self-dealing," considering that Prime Capital Chairman Michael Reschke is a director in Horizon and Gary J. Skoien, Horizon's president and CEO, is an officer with Prime's parent company. But Prime said proposed legislation governing preferred stock subsidiaries eliminated the tax advantages of the merger and killed the deal.

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Ahold buys Pathmark,
to merge with Edwards

Dutch supermarket giant Royal Ahold continued its Northeast U.S. grocery shopping spree by agreeing to buy 132-store chain Pathmark for $1.75 billion, including $1.5 billion in debt. Ahold said it would convert a previous acquisition, Edwards Supermarkets, to the Pathmark name, gaining particular clout in metro New York and Long Island, N.Y., where Carteret, N.J.-based Pathmark boasts 12% market share. A pioneer grocery consolidator, Ahold in recent years has acquired the Giant, Finast, Tops, Bi-Lo, and Stop & Shop chains. The deal is expected to close in the fourth quarter.

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RealFund buys interest in Toronto center

RealFund, a Toronto-based REIT that at press time was being pursued by rival RioCan Real Estate Investment Trust, said it would acquire a 50% interest in Kennedy Commons Shopping Center, a 407,000-square-foot center under construction in Toronto, for $30 million. The deal is part of RealFund's strategy to become involved in mezzanine financing -- RealFund provided $15 million to fund construction of the center. The center is jointly owned by First Gulf Development.

Analysts: Stock buybacks boon for REITs

Real estate investment trusts, which grew over the last several years through acquisitions and equity issuance, are now being advised to do the opposite.

Analysts at Merrill Lynch and Paine Webber each issued reports in March suggesting that some REITs could help awaken their slumbering stocks by selling assets and buying back shares. Analysts say the strategy could work by reversing the "positive-spread" investing model that helped many REITs grow.

REITs boomed over the last several years in part because they were able to acquire properties at a yield higher than their cost of capital, making money on the arbitrage, or spread, between the cost of capital and the yield of the acquisitions. Today, with REIT stocks trading at a 17% deficit to net asset values, companies can take advantage of spreads by selling lower-performing properties at a higher yield than their cost of buying back stock, analysts say.

"A depressed stock price can actually present a significant opportunity to add to shareholder value," said Eric Hemel, a REIT analyst for Merrill Lynch. "REITs were extremely aggressive in exploiting the public/private arbitrage in previous years by purchasing real estate and issuing equity. Now, for many companies, we believe there are opportunities to exploit the arbitrage in reverse by selling real estate to repurchase equity."

Shopping center financial professionals said that they see the logic in the analysts' argument, but have doubts about the viability of the strategy. "The problem is, it's a little too theoretical," said Bernard Freibaum, CFO of General Growth Properties, Chicago.

John Foy, CFO of CBL & Associates Properties, Chattanooga, Tenn., feels his company can get a better return by sinking its capital into redevelopment projects and new developments. CBL has several such projects under way.

"There's a lot of sense to [the analysts' strategy], because property values have gotten so far out of whack since everybody's been buying them -- the properties are more expensive than stock," said Foy. "The question for us is, what would you do with your money if you didn't buy back your stock? Can you get a better return on it by using it to grow your company?"

Freibaum agreed, adding that the process of selling malls takes several months, a time during which stock prices could rebound.

"It's hard to know what the stock market will be six days from now as opposed to six or nine months from now," Friebaum said.

Both CFOs said they regularly consider selling assets, regardless of stock prices.

The analysts acknowledged that buybacks would be most effective when used as part of a broad management initiative that includes asset sales and paying down of debt. Simply buying back stock to send a message that stocks are undervalued isn't enough, according to Jonathan Litt, a Paine Webber REIT analyst who has advised against buybacks in the past.

In order for a sell/buyback program to be effective, a company must be aggressive, selling up to 20% of its lower-performing assets, Litt said. The program would be best for those companies with small development pipelines, few near-term acquisition opportunities, and those trading at high discounts to net asset value, he added.

Arguing that returns from real estate holdings are more important than the size of the portfolio, Litt urged REITs to put aside the "empire building" attitudes that might impede a sell/buyback program.

"Paring back a portfolio of its low-growth assets, and using the proceeds to retire debt and repurchase stock, can have an effect of core portfolio performance that is at least as strong as undertaking aggressive capital-intensive redevelopments," Litt wrote. "The ultimate goal has to be increasing shareholder value, whether or not that involves building ever-bigger real estate empires."

Source: Paine Webber Inc.

The Retail REIT Index was designed for Shopping Centers Today. The stock price movements were calculated starting at a base of 100 on Dec. 31, 1995. For the month ending March 29, the regional mall index is at 114.20, down 3.2%; the strip center index (including power, neighborhood and community centers) is at 106.13, down 4.0%; and the factory outlet index is at 67.5, down 2.5%. The index is updated monthly.