Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Real Estate Operating Companies (REOC) -- Ignore unavailable to you. Want to Upgrade?

To: 249443 who wrote (16)	9/19/2001 8:12:17 PM
From: 249443	Respond to of 95

REITs Learn They Don't Need a Certain 'E' in Their Businesses By Christopher Edmonds Special to TheStreet.com 7/10/01 11:43 AM ET URL: thestreet.com While investors can learn a lot from the dot-com implosion, a handful of real estate companies have hopefully learned a valuable lesson. Take, for example, AMB Properties (AMB:NYSE). The company was your typical industrial, warehouse-owning real estate investment trust, or REIT, just three short years ago when it decided it would catch the dot-com wave. AMB's strategy was to court dot-com tenants, those nifty e-commerce companies that would change the world of business and, at the same time, provide quick profits. AMB took its relationships with these neophyte companies a step further, in some cases not only offering to lease them space, but also accepting -- in some cases almost demanding -- an equity stake in the businesses in return for a place these companies could call home. In 1999, the temptation of quick money was too much. In 2001, companies like AMB couldn't run and hide fast enough. And, Monday, when Webvan (WBVN:Nasdaq) called it quits, AMB's dream-turned-nightmare finally came to an end. In its second-quarter earnings announcement Monday, AMB said it would take a $16.1 million charge, or 18 cents per share, for "impairment reserves on all of the company's private equity investments in technology and e-commerce companies." In addition, the company took a 2-cent per share depreciation charge for lease-related expenses associated with Webvan facilities. The company holds leases with Webvan on facilities in Atlanta (closed), Washington, D.C. (never opened) and Seattle. The charges announced yesterday are in addition to a $4.7 million -- or 5 cents per share -- impairment charge the company took in the first quarter against its investment in Webvan. According to AMB's first-quarter filing with the Securities and Exchange Commission, "The loss reflects a 93% loss in value on the investment [in Webvan]." AMB's chairman and CEO, Hamid Moghadam, was remorseful for the loss. "During 1999 and 2000, AMB made equity investments in eight private technology and e-commerce companies," he said in a statement announcing AMB's quarterly results Monday. "In order to reflect changes in market conditions, we decided to fully reserve against our remaining net investments in these companies and take the charge against earnings this quarter. We learned a great deal about the impact of technology on our business and that of our customers through these investments. We are disappointed that these equity investments did not meet our financial expectations, but we believe that we have now put these challenges behind us." Let's hope so. Certainly, AMB's investments won't break them. In fact, their real estate fundamentals remain very stable. However, the lack of corporate focus and discipline -- especially into a venture far astray from a company's core competency -- can raise questions that linger over time. To be fair, AMB wasn't the only company to be bit by the allure of "dot-com-dom." While many companies didn't jump at the equity temptations like AMB, a host of REITs relaxed underwriting standards, developed creative lease structures and, in some cases, took equity in lieu of rent to attract the e-commerce start-ups many thought would be the future. Examples that quickly come to mind include Kilroy Realty's (KRC:NYSE) large Los Angeles lease with eToys and First Industrial's (FR:NYSE) relationship with Amazon.com (AMZN:Nasdaq). eToys disappeared entirely, while Amazon vacated a custom warehouse facility in metropolitan Atlanta just about year after it moved in. (Amazon has pledged to continue lease payments to First Industrial.) In addition, a number of REITs pursued various e-commerce ventures that are now just a distant memory. Tanger Factory Outlets (SKT:NYSE) and Prime Retail (PRT:NYSE) -- both outlet center owners -- poured millions into now failed attempts to develop virtual outlet malls. Even Simon Property Group (SPG:NYSE) had grand plans for online ventures that have been drastically scaled back. And, can you name one of the plethora of office REIT initiatives looking to leverage the Internet wave to riches that is still going strong? Didn't think so. Most have been shuttered or sold, the only memory left in write-downs to original investments. The lesson here is simple. REITs and real estate executives need to stick to their core competency: owning and managing real estate. Forays outside those core competence almost certainly lead to unhappy endings. That lesson has been learned in the past and, unfortunately, will likely be learned again in the future. It's a lesson AMB has just completed. "Although we are disappointed by this charge, we are hopeful that this will bring an end to the noncore issues surrounding AMB," noted Salomon Smith Barney REIT analyst Jonathan Litt. Let's hope all REITs are listening.