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JON FOSHEIM / MICHAEL KIRBY : Searching Out the Right REIT : Green Street's Advisers Give Big Investors the Glad Word

February 27, 1989|Michael Flagg | Times staff writer

Jon Fosheim was selling investments to big institutional investors at the New York brokerage of Bear, Stearns & Co. in 1985 when he met Michael Kirby, an intern with an MBA from the University of Chicago.

Kirby didn't want to live in New York, and Fosheim didn't want to sell investments. So they formed a company to buy bad real estate loans from banks.

But where to locate? The two got out a map and looked for a warm place with an airport. They found Newport Beach.

"It helped that it was snowing and 20 degrees below zero the day we decided," said Kirby, 28.

The new business didn't work out. But the two discovered another niche along the way: Few people seemed to know much about a type of real estate company the two kept encountering. It was called a Real Estate Investment Trust.

"People who knew would tell us about one that had troubles, but we'd read a research report and it would say how great the company was," said Fosheim, 38.

REITs--"Reets," as they're called--have to pay out 95% of net earnings to stockholders. In return, the REIT doesn't have to pay taxes on that income. That means a nice yield for investors if, of course, the company is well run. It also makes for a much easier and cheaper real estate investment than, say, buying an office building.

But it also means that such companies are constantly offering new stock to the public to replenish their coffers. And the brokerage houses that underwrite such lucrative offerings employ the analysts who write the investor reports on the company.

And therein lies an inherent conflict of interest, say Kirby and Fosheim. Sometimes that conflict results in puffy, worthless analysts' reports that make it hard to distinguish between the dog companies and the gems.

How do you find the gems?

Meet Green Street Advisors Inc., the new incarnation of the company Kirby and Fosheim formed in 1985. In the investment adviser business for about 2 years now, the two work--usually sans suits and ties--out of a small office in a low-rise building at Newport Center. They advise only big institutions and a few wealthy individuals--small investors need not apply.

In fact, Green Street numbers some of the biggest institutional players in the industry as clients: Citicorp Trust, Fidelity Investments, First Pacific Advisors.

The two men say the reason the firm has done well so far is that it doesn't sell stock in the 30 companies it covers, and it doesn't underwrite for those companies or for the nation's other 70 publicly traded REITs.

Kirby and Fosheim recently discussed their strategies with Times staff writer Michael Flagg.

Q. Because your company's not selling stock in any of the concerns you cover, your reports are sometimes surprisingly candid. Do you ever get nasty feedback from some of those companies?

FOSHEIM: A good example of where we got some positive feedback would be Burnham Pacific Properties (a San Diego REIT). In a recent report, we were critical of their above-average overhead. Lou Garday, the chief executive officer, is the type of executive that is not offended by that at all. In fact, when we saw him at a (trade association) meeting, he came up to us and said: "Guys, we really took your criticism to heart, and we're doing our damnedest to get those figures down to an acceptable level." The ones that are doing a good job--none of them are doing a perfect job, we don't do a perfect job--but the top-notch ones take our criticism to heart.

Q. Surely not all of them take criticism that well.

FOSHEIM: If we're questioning their integrity, probably they don't take it to heart. But we now have enough clout--if the chief executive, for example, turns around and tries to get back at us or to be vindictive--that he's not attacking just us. He's attacking a group of institutional shareholders that he covets, that he knows we're the eyes and ears for. So he has to tread carefully. The institutions will sometimes tell him, "Hey, we're shareholders of this company, and by locking the door on them you're locking the door on us."

Q. How do you go about researching one of these companies, about which most people know very little?

KIRBY: First of all, we look at the market capitalization (the total of a company's shares times its price, often used by institutional investors as a criterion for investing). It would be great to come up with a small company that had fantastic prospects, that was undervalued and all the other reasons you'd buy a stock. But if it isn't a big enough company that our customers can buy a big block of shares, it does nobody any good. As a rule, the companies we cover have to be at least $50 million, and most are considerably larger than that.

Q. Any other criteria?

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