No. of Recommendations: 10
the phenomenon of managements always talking about how they are selling "non-core" assets. (Not HME in particular, but REITs in general). When and why did they acquire these "non-core" assets and does anyone on the payroll get punished for it? They talk about them as if they just came -- by stork I suppose. Success has many fathers but failure is an orphan. "Non-core" is code for "regretted."

Ah, yes, Jim...great point. You are certainly right, the phrase "non-core" is indeed a euphemism for "regretted." For those who haven't lived through the difficult REIT period of 1998-1999, here's a bit of history:

All this came about due to (1) the lack of sophistication of many REIT management teams in the mid-1990s, (2) the belief -- "hubris" -- of many of these management teams that they were doing "good things" by acquiring properties in far-flung locations, and (3) the erroneous belief of sell-side analysts and many investors that "FFO accretion" coming from property acquisitions could add value for investors. Wrong on all counts.

What happened, all too often, was that the focus of conference calls was "acquisition pipelines," and the management teams were pressured into raising lots of capital and buying properties, often with no thought as to how these acquisitions would add value in the long run (some managements, though, didn't need anyone to push them... just like giving financing to developers will cause them to develop, offering money to these executives insured that they would buy something).

Thus scores of REITs bought marginal properties in far-flung markets where they had no "presence" or local expertise. Of course, these assets often didn't perform well, and they bloated the size of the REIT to the point where those really good deals made in their own backyards didn't add much to the bottom line. Since these sick chickens have come home to roost, these managers are now trying to make silk out pigs' ears by taking credit for "pruning non-core assets."

Not too many REITs were disciplined enough to avoid these temptations, and thus that era was appropriately labeled "the Great REIT Pie-eating Contest." The good news is that most of these guys have learned their lessons, and are now believers of the Asset Recycling Doctrine. By selling assets to which they cannot add much value and focusing on their core competencies, a large number of REITs have been able to avoid raising expensive equity, are keeping their market caps small enough to benefit from those occasional really good deals, and have more expertise in a smaller number of markets.

The bottom line is that, while we must endure the managements' lack of candor in describing the reasons for selling these "non-core assets," the net result is that most REITs are in a better position to add value for their shareholders -- and have, hopefully, learned some valuable lessons. Perhaps one reason why Brandywine's shares haven't performed well since announcing the Prentiss acquisition is that investors are viewing them as "backsliders." Rather than trimming assets, they are expanding their balance sheet and asset base, entering markets in which they are not capable of adding much value. A throw-back, perhaps, to the bad old days of 1995-1997?

Ralph


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