REIT trend accelerating in Baltimore Local market tardy in partaking of the advantages

Time to grow or die

Understanding why Questar sold out to Berkshire Realty

November 30, 1997|By Kevin L. McQuaid | Kevin L. McQuaid,SUN STAFF

Stephen Gorn knew that he couldn't keep his family's business going much longer, without making some dramatic changes.

The third generation to run the Questar Cos. and its 18 area apartment complexes, Gorn realized that the status quo would eventually leave the privately held company at a competitive disadvantage, in an era in which real estate investment trusts -- publicly traded concerns with wads of Wall Street cash and management expertise -- dominate.

Gorn realized, too, that the status quo -- remaining a relatively small, independent apartment developer and manager as Questar had for five decades -- would limit future development, since traditional lending sources' interest rates are typically much higher than are those of REIT loans.

Faced with a near-certain future of uphill battles, Gorn sold out -- but on his terms.

The resulting $171 million Questar deal with Berkshire Realty Co., a Boston-based REIT that owns $1 billion worth of apartments nationwide, will ensure that Questar not only survives, but prospers.

"One of the realities of the 1990s is that REITs are very competitive," said Gorn, who with the alliance became president of Berkshire's newly formed mid-Atlantic division. "Private companies just can't be as competitive today for debt or equity capital. This allows us to grow."

And for those who've not been paying attention, the mantra of business in the 1990s is: Grow or die.

More and more, Gorn's conclusion about REITs is being shared by many owning Baltimore real estate, an industry once almost exclusively made up of local, privately held players, and evidenced in a series of transactions and corporate changes.

In the past month, Baltimore has witnessed an explosion of REIT activity, thanks in part to its rebounding economy and because of escalating property prices in cities such as New York, Chicago, Houston, Washington and Los Angeles.

"I think in part it's a function of our market being tertiary," said Robert A. Frank, director of research at Legg Mason Wood Walker Inc. "The REIT phenomenon is accelerating, and Baltimore is just now being included."

Frank and other analysts contend that more than an ephemeral flurry, however, the recent REIT activity represents a larger trend toward institutional and public real estate ownership that will forever change the business landscape.

"This is simply the next step in the REIT industry's evolution," Frank said. "It's the acquisition of private real estate by public real estate companies. REITs allow small and private development firms to continue their businesses in a different platform, with REITs as a capital source."

"We're not in a 'if you can't beat 'em, join 'em' phase yet," said Catherine C. Creswell, a BT Alex. Brown Inc. principal and REIT analyst. "But we're getting close."

Perhaps most dramatic, Rouse Co. announced plans to convert to a trust on Nov. 20, after years of bucking the format. In electing to become a REIT, Rouse cited the millions of dollars a year it will save thanks to federal laws that allow trusts to avoid corporate income taxes, the ability to acquire other REITs and increased Wall Street exposure.

Riparius Development Corp. was motivated to hook up with a North Carolina REIT to save taxes, too. As part of an estimated $80 million deal that will fold the Timonium developer into Highwoods Properties Inc., Riparius will avoid the potentially huge tax liabilities that come with commercial property sales.

That's because under federal law, REITs can offer tax-free "operating partnership units" in exchange for buildings and land, units that can later be converted to common stock.

Riparius' alliance, too, will give it access to Wall Street capital. For Riparius, that means the financial muscle to develop a 180-acre business park in Owings Mills, planned to contain a small city of office and other commercial space.

The REIT explosion isn't simply a local phenomenon, of course. Nationwide, voracious buying by REITs eager to bolster operational earnings has been fueled by the bull market on Wall Street and the desire by mutual and pension funds to diversify their portfolios with real estate. Earlier this month, for instance, T. Rowe Price Associates Inc. began a fund to purchase REIT securities.

The industry, too, has evolved and gained acceptance over the years, outperforming the Standard & Poor's index throughout the 1990s. As a result, REITs' total market capitalization -- debt plus equity -- has grown from $13 billion in 1990 to $131 billion at the end of October.

"It's not just Baltimore, so don't take it personally," said Martin Cohen, chairman of New York-based Cohen & Steers Capital Management, the king of REIT stock owners with $6 billion in holdings. "What's happened is that REITs have gained investor confidence, so now they are able to purchase properties and companies quite effectively."

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