Look at the Losers

— In batting a baseball, two out of five is spectacular: a .400 average. If the two hits are home runs, it's truly sensational. In the investment world, two successes out of five tries can be good for speculators, especially if the two successes are home runs. But for conservative investors who want income and relative safety, two out of five will likely be a disappointment, and possibly similar to two out of five successes in fielding a baseball: horrid.

San Diego is batting .400 in the real estate investment trust (REIT) league, the arena of conservative, income-oriented investors. The two successful ones are home runs, but the three losers are embarrassing strikeouts.

A real estate investment trust owns and usually operates real estate such as apartments, offices, shopping centers, hotels, and warehouses. These trusts pay at least 90 percent of their taxable income to shareholders. The stocks normally pay hefty dividends -- yielding 5 to 8 percent.

Since early 2000, the overall stock market has been in one of history's nastier bear markets. During this period, stock of the Vista-based real estate investment trust Pan Pacific Retail Properties has more than doubled, and shares of Escondido-based Realty Income have doubled. In reaction to recent soaring earnings, Pan Pacific's stock price zoomed to the point where the yield dropped to 4.3 percent. Investors then backed off a little. Realty Income's yield has been a bit shy of 6 percent. These two are winners.

But look at the losers. American Residential Investment Trust lost money steadily until it dropped its real estate investment trust designation last year. Price Legacy cut its common-stock dividend to zero as earnings and the stock price dropped, amid board and top-management turmoil. Burnham Pacific Properties liquidated in ignominy, angering investors.

Since going public in 1997, Pan Pacific stock has beaten the Standard & Poor's 500 index and the average real estate investment trust by 200 percent. It has been successful buying neighborhood and community shopping centers anchored by grocery stores. "Grocery-centered retail is as strong as it has ever been," says chief executive Stuart Tanz, who has steered the incredible performance. The company is almost entirely in five markets: Southern California, 34 percent; Northern California, 27 percent; and Nevada, Oregon, and Washington the balance.

Realty Income takes a different approach. It owns and operates single-tenant retail properties. Almost 20 percent of the tenants are in child care, 12 percent restaurants, and 13 percent convenience stores. The company has raised its dividend for 24 straight quarters and paid dividends for 401 straight months.

"Both companies are well managed, and although they are quite different from one another, they have strong strategic visions and have stuck with the game plan and never deviated from it," says David Allen, an expert in San Diego stocks with Palomar Equity Research.

However, both have done so well that "I don't see much upside left [in their prices]," he says. But since both have good dividend yields, he would hold on to them. Both have relatively low debt levels -- a big plus for a real estate operation.

If interest rates remain low, and that's possible, both stocks could stay strong, even though they sell at a premium to other trusts.

Realty Income "is doing well fundamentally and knocking the cover off the ball on the acquisition front," says Anthony Paolone of J.P. Morgan, who nonetheless worries that "valuation is a bit rich."

"We suffer from sticker shock from Realty Income," says Andrew L. Rosivach of U.S. Bancorp Piper Jaffray, who doubts that the stock will outperform the rest of the market this year, but next year, aided by earnings "oomph," the company should be out in the lead again.

William T. Camp of A.G. Edwards points to "an exceptionally strong balance sheet" and "a monthly dividend that grows each quarter."

Pan Pacific, which expects 13 to 14 percent growth this year, should be hiking its dividend before too long, says Lee Schalop of Banc of America Securities. By one measure, Pan Pacific's growth over the last 15 quarters has "been an unbelievable 9.7 percent" a year, says Richard C. Moore II of McDonald Investments.

Pan Pacific is "an acquirer of assets, not a developer," and that lowers risk, says Christopher J. Hartung of W.R. Hambrecht. But he points out a significant risk: Wal-Mart. The huge discount retailer plans to build 40 supercenters in California and may gain grocery-market shares as a result of the strike. Big grocers are worried about Wal-Mart -- one reason they have held the line on strikers' demands. A positive, though, is the public's stiffening resistance to Wal-Mart incursions.

Three other San Diego trusts have done poorly for various reasons: excessive speculation, inability to pay dividends and prosper as a trust, poor management, board backbiting, and hubris. American Residential Investment Trust was founded in 1997 as a trust specializing in acquisition of home mortgages. But it lost a bundle of money from 1998 through 2001 and in 2002 decided to drop out as a real estate investment trust and will concentrate on mortgage banking.

Price Legacy, the result of a merger in 2001 between Price Enterprises and Excel Legacy, focuses on open-air shopping centers. But the stock has sunk below $4 as losses have mounted. The dividend is nil. Among many things, Price is owed money by developers in the Phoenix/Scottsdale area. One development was to be the home of the Phoenix Coyotes hockey team, which then found another location. "We're trying to wean ourselves from professional sports," says chief executive Jack McGrory. (Many San Diegans, viewing McGrory's missteps as city manager, wish he had weaned himself off pro sports long ago.) McGrory vows that the company won't get into speculative deals (such as in entertainment and hotels), will get rid of poor properties, and concentrate on power centers featuring discount retailers such as Costco.

The company has been marked by discord. Forty percent of the stock is controlled by Sol and Robert Price and their confreres. In the summer, they went to court against another board member -- a rarity. The dispute was settled, but in September, three top executives, including the then-chief executive, departed. There has also been top-management turmoil, as well as an accounting imbroglio and stock-price setback, at another Price family-dominated company, PriceSmart, but McGrory says it's just a coincidence.

"Jack McGrory has never established himself as a real estate investment trust manager," says Allen, who thinks highly of the executives who resigned. "There is no reason to buy a REIT with no dividend unless you are banking on a turnaround." And that could be some time down the road, if ever.

Finally, there is Burnham Pacific Properties, which once sported well-located and well-diversified San Diego holdings. San Diego real estate scion Malin Burnham played a key role in the company, but management permitted a San Francisco real-estate magnate to gain control. At first, things were glorious. In late 1998, the powerful California Public Employees' Retirement System contributed $250 million worth of properties in a linkup with Burnham that made national headlines.

But some speculative efforts in the Bay Area and elsewhere did not bear fruit. In 1999, an Ohio entrepreneur bid $13 (later $13.50) a share for Burnham stock when it was selling for $11. The board said Burnham was worth more and set up defenses. Eventually, the company simply liquidated, and it appears that shareholders will get around $8 a share. Understandably, they are bitter; they could have received far more for their stock, and also haven't been receiving the stout income they had become used to getting regularly.

The properties are now almost entirely liquidated, and the stock has been trading for around 30 cents. Experts in the real estate investment trust industry consider it one of the major scandals of the past decade.

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