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Glenborough Realty: Setting a standard for today's REITs

This REIT is providing high total returns for shareholders by diversifying both its geography and its products.

It's the darndest thing. I had just finished speaking with this company from San Mateo, Calif., and heard about these acquisitions it was making around the nation, even some here in Atlanta. While being impressed by all this, I wasn't sure how to start the story.

Then as I was walking out of the building that afternoon, I noticed a memo on the door, and this particular memo was announcing that the annual ice cream social for building 6151 had finally arrived. Well, it gets pretty hot here in the South, so we greatly enjoy eating ice cream (even more so when it's free). Being excited about this event, my concern about how to start that story completely slipped away, and I asked myself, "Who are these people that give us ice cream every year?" Looking up at the top of the memo, I saw the name Glenborough.

"No, it couldn't be," I thought but, not being certain, I trotted back to my desk and flipped through my information, and there it was in black and white. One of Glenborough Realty Trust Incorporated's excellent long-term performers in the Atlanta market was indeed 6151 Powers Ferry Landing East.

And I don't suppose they were exaggerating when they spoke of all those acquisitions, because I then read that Glenborough had doubled its presence in the Atlanta market with the purchase of the 294,000 sq. ft. Ashford Perimeter building and our own 394,000 sq. ft. Powers Ferry Landing East, and it now owns approximately 1.3 million sq. ft. in the metro area.

But besides offering its office tenants ice cream, the company does a few more things differently from its competitors. The major difference being that it is a public company that is not only geographically diverse, but it has property diversification as well.

In the history of REITs, it originally was preferred by Wall Street for public real estate companies to focus on one property type like office or retail but, more recently, Wall Street has begun to see the advantages of diversifying a portfolio. But long before Wall Street understood this, Glenborough knew well the advantages of not putting all your eggs in one basket.

"Glenborough and its predecessors have owned and operated diversified portfolios for almost 20 years," says Robert Batinovich, chairman and CEO. "This experience combined with the company strategy, our employee dedication and management systems have led to GLB's success."

Apparently this diversification strategy has worked well for the company. In 1997, Glenborough Realty Trust posted a total return of 78%, following a 57% total return for 1996. These numbers made it one of the top performing REITs for both years, says Andrew Batinovich, president and COO. During 1997, FFO per share increased 15%, and the dividend increased 31% to $0.42 per share starting with the dividend for the fourth quarter 1997. Since January of last year, Glenborough has acquired in 20 separate transactions $1.3 billion of real estate, comprising 14.6 million sq. ft.

Before commencing operations as a public company in December of 1995, what is now known as Glenborough Realty Trust was once eight limited partnerships with diversified interests and a nationwide real estate investment management company.

"The limited partnerships were static investment vehicles," says Andrew. "The partners chose to roll up into a REIT because it provided them with an exit strategy, growth potential and liquidity."

Today, Glenborough's portfolio comprises more than 18 million sq. ft. in 33 markets, which is managed through a network of more than 30 offices nationwide. In addition, Glenborough has two associated companies, Glenborough Hotel Group and Glenborough Corp., which control similarly diversified portfolios comprising 48 properties. Combined, the assets encompass approximately 22 million sq. ft. throughout 24 states.

Glenborough's strategy is to maintain and grow this diversified portfolio, which includes office, office/flex, industrial, retail and multifamily, says Andrew, who adds that institutional and private investors recognize three distinct benefits to this strategy: diversification of risk, the bulk acquisition price advantage and flexibility of the portfolio.

"As an example, in 1997 we more than doubled our suburban office and office/flex holdings as a percentage of our total portfolio," says Robert. "We successfully increased our percentage contribution to NOI to 54% for office and 20% for office/flex from 30% and 4%, respectively. Not coincidentally, the first quarter's largest same store NOI increase was in our office segment."

Another advantage of being a diversified REIT, says Robert, is that the diversification appeals to many real estate owners looking to sell their assets, and the fact that Glenborough uses the UPREIT transaction structure doesn't hurt. "Often, the owner is selling to diversify assets," he adds. "Sellers desire OP units to defer tax consequences, and we offer our diversification structure, which many sellers prefer."

As an example of Glenborough's strategy, Robert offers the 1997 acquisition of the T. Rowe Price portfolio for $147 million. In this transaction, Glenborough acquired five separate entities (four limited partnerships and one private REIT) and 27 properties in 12 states. The 27 properties consisted of four different property types.

Analysts agree that this strategy is working well. "Investing in a diversified portfolio of properties is fairly unique for REITs, which typically specialize in one property type," Michael J. Sgro of Salomon Smith Barney stated in his Feb. 2 report on the company. "From the seller's point of view, this is advantageous because it allows for one deal to be completed for a portfolio without having to negotiate multiple contracts with multiple commissions and the added risk of deals being abandoned. This is a competitive advantage for Glenborough because the company can typically acquire portfolios faster, at (higher) cap rates, than if the properties were negotiated individually. In addition, the UPREIT structure addresses the sellers' tax concerns and allows GLB to use its stock as capital."

Sgro initiated the coverage of the company with a 2M (outperform, medium risk) rating and a $34 target for a potential total return of 14%.

Christian Payne of Cruttenden Roth named Glenborough Realty Trust as the top stock recommendation for 1998, in a year-end 1997 statement which rated Glenborough as a strong buy.

Jay Leupp of BancAmerica Robertson Stephens agrees. In a March 10 statement, Leupp said: "We are urging investors to take advantage of the recent price weakness in GLB shares. We estimate the company will complete a total of approximately $898 million of acquisitions in 1998 and $460 million of acquisitions in 1999 at initial yields of 9.6%. Year to date, the company has completed $423 million of acquisitions and is on pace to exceed our 1998 acquisitions estimate."

Others reiterate this, with Bear Stearns & Co. Inc. Equity Research and Jefferies & Co. Inc. giving GLB a buy recommendation and BTAlex.Brown Research rating Glenborough as a strong buy.

Because this strategy is working so well for the company, it plans to keep the strategy the same for awhile. "We will continue to grow using the same diversification strategy," says Andrew. "By the year 2000, we hope to be one of the leading REITs in terms of total return to shareholders."

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