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Burnham Pacific Expected to Accept Reduced Offer

Analysts predict that the troubled REIT will be sold to a group known as Coventry Real Estate Partners.


At a time publicly traded real estate investment trusts are bouncing back on Wall Street, one of the oldest REITs--which shares its name with one of San Diego's best-known real estate dynasties--appears to be fading fast.

Amid continued accusations of senior management "entrenchment" at the expense of shareholders--and a stock price that has fallen by nearly half in the last year--observers expect strip shopping center owner-operator Burnham Pacific Properties to soon announce sale of the company to a group that includes another retail REIT, Cleveland-based Developers Diversified Realty.

The buyer will probably pay about half the price that another group offered a year ago--a further disappointment for Burnham Pacific shareholders.

The consensus among the few analysts and other real estate stock specialists who follow the situation is that Burnham Pacific's board will soon accept an offer from the group known as Coventry Real Estate Partners, which teams Developers Diversified with a real estate opportunity fund managed by financial giant Prudential.

Coventry appears to be the one remaining outside bidder, but observers say there could be an alternative offer from Chief Executive J. David Martin and other senior Burnham Pacific brass, noted Barry Vinocur, editor of the REIT industry insider newsletter Realty Stock Review.

Veteran REIT analyst Craig Silvers at Sutro & Co. in Los Angeles said he has also heard that a deal with Coventry is imminent. And the fact that Developers Diversified recently boosted its credit line by $175 million seems to support that contention.

"It's just too coincidental-- and it's enough to cover DDR's share of the [Coventry] equity commitment to a Burnham deal," Silvers said.

While it's impossible to predict exactly how and when management will make a deal, observers say an announcement could come after the Burnham Pacific board meeting Monday. Burnham Pacific executives aren't discussing the prospects publicly. Nor will Developers Diversified representatives confirm that a deal is near.

Various other prospective buyers have reviewed Burnham Pacific's assets and liabilities and "passed," Vinocur said. He estimated a buyout deal would most likely be around $6 per share--well below half the tentative $13.50-per-share buyout offer made a year ago by a group headed by Ohio-based shopping center magnate Jay Schottenstein.

"But there are lots of moving parts, and it will depend on how the deal is structured," Vinocur said.

One complicated possibility is that Coventry may purchase most or all of Burnham Pacific's primary assets (the real estate), leaving liabilities in a shell company that would need to retain reserves for potential litigation--which would reduce the initial cash distribution to common shareholders.

Another possible scenario would have Coventry buying a large portion of the Burnham property portfolio while a revised board brings in a new management team to oversee the balance.

But considering that a pair of large institutional groups hold about $120 million worth of preferred Burnham Pacific shares, it's hard to envision any realistic scenario that won't be painful for common stockholders, Vinocur said.

"That's the biggest issue; getting shareholder approval," said Vinocur, considering the "low regard" many shareholders now have for the management.

Schottenstein, who controls nearly 10% of Burnham Pacific stock, and other shareholders have blamed Martin and other senior executives for the drop in Burnham Pacific's value. They say that such measures as asset sales, lucrative "golden parachutes" approved for senior managers and the elimination of a joint investment program with pension giant CalPERS have combined to devalue the company's stock.

Management has also thrice postponed the company's annual meeting, initially scheduled for May. This has thwarted Schottenstein's efforts to name new directors.

Burnham Pacific has seen its financial fortunes fall precipitously since the board rejected Schottenstein's offer (which included key contingencies) and engaged Goldman Sachs & Co. to help consider and pursue "strategic alternatives."

Burnham Pacific shares traded at well over $14 in early 1998, and nearly $13 a year ago after Schottenstein sweetened his offer to $13.50. It hit a low of $6 in late March, and closed Monday at $7, up 13 cents, on the New York Stock Exchange.

Burnham Pacific has been a REIT for nearly four decades, but the saga that's unfolded over the last 12 months certainly doesn't put the Burnham name in a positive light.

Founder Malin Burnham remains chairman of Burnham Pacific as well as the non-owner chairman of both commercial insurance firm John Burnham & Co.--whose predecessor was founded more than 100 years ago--and the Burnham Real Estate Services operation. Burnham Real Estate Services, now owned by senior managers and JMI Realty, arguably remains the most influential of the locally based brokerages handling sale and leasing transactions.

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