A Tech-Centric Real-Estate Play

Looking for a tech stock with a 6% dividend, real earnings and a book value of about 40 per share? At least one fund manager suggests looking at Spieker Properties (SPK Quote), a real-estate investment trust.

Sound unusual? It is. Spieker is a unique real-estate play with assets heavily concentrated in Silicon Valley and the San Francisco Bay area and a savvy management team that shoots straight with investors.

Spieker owns more than 40 million square feet of office and industrial buildings in California and the Pacific Northwest, with a significant concentration -- more than 40% -- in the San Francisco and Silicon Valley markets. The company's buildings are leased primarily to firms that turn the engines of the new economy. "Spieker is the real-estate way to play the technology boom," says Sam Lieber, president of Alpine Management, a real-estate investment management firm that has a position in Spieker.

The company posted funds from operations, or FFO -- a REITs measure of cash flow -- of $3.46 per share vs. $2.96 in 1998, a 17% increase and 5 cents ahead of analysts' estimates.

In Spieker's case, past is prologue. In the fourth quarter, Spieker was able to increase rents an average of 40% when expiring leases were renewed, and more of the same is expected in the months ahead.

About 20% of Spieker's leases expire this year and another 16% expire in 2001. According to Donaldson, Lufkin & Jenrette's Tony Palone, that presents great opportunity for Spieker. "If they just block and tackle they'll grow 10% this year and next," he says. "With new development and reinvestment, the number is likely to be much higher." Palone rates the stock a buy, and DLJ has provided banking services to Spieker.

Spieker benefits from the a priori advantage of real estate: location. As demand for real estate escalates in technology-laden northern California, a lack of available property and high construction costs inhibit additional supply.

"Spieker is rolling up rents in a very tight, technology-driven market," says J.P. Morgan Asset Management's Daniel O'Connor. "And, there's not much chance of new supply. Land is too scarce and development too expensive." Spieker's vacancy rate is running less than 3%. O'Connor's firm holds a position in Spieker.

All that has longtime Spieker follower and Goldman Sachs REIT analyst David Kostin looking to the future. "It's one of the best stories in the industry," he says. Spieker is on the firm's recommended list. "We believe the stock could reach $50, 25% above the current price, without incorporating any heroic assumptions regarding future rental growth." Goldman has provided banking services to Spieker.

But others say the stock, now trading 10.7-times 2000 FFO, compared with 7.6-times for the average office REIT, is expensive. "There's nothing not to like except the price," says Jim Grissett, the principal of The Parthenon Group, an Atlanta-based real-estate money manager. "Spieker is a great company but it's a little expensive." Grissett does not hold a position but says he would be attracted if it pulled back into the mid-30s.

What makes Spieker so attractive may also be its biggest risk. With the company's growth closely tied to continued "new economy" prosperity, some worry about the impact of an inevitable slowdown. "Technology is the wild card," says Lieber. "If the love affair with tech and IPOs fades, the story changes."

Spieker is well-positioned to weather a Silicon Valley slowdown -- the company is only 38% leveraged. Nevertheless, "If something happens to the Internet, the market may overreact with Spieker," speculates J.P. Morgan's O'Connor. "It would be misperception, but it could happen."

Goldman Sachs' Kostin says Speiker is very conservative. "The entire Internet exposure is only about 3%," he says.

With a tech slowdown unlikely, at least in the short term, the company seems poised to move ahead. Kostin and others have moved 2000 and 2001 FFO estimates up to $3.80 and $4.25 from $3.75 and $4.15, respectively, figures he says may be low. "If the economy remains strong and demand remains high, those numbers are very conservative." In a scenario where Spieker is able to roll all expiring leases with 40% increases, Kostin estimates FFO could be closer to $3.93 and $4.64 over the next two years.

DLJ's Palone is more bullish. "The numbers for the next couple of years are too low," he says. "Strong demand, great management and a solid balance sheet. They have an edge."

Palone is speaking, of course, of the fundamental edge. But, what about a technical edge. For those who are geometrically challenged, look no further, but for those of you who live for Chartman, I've invited him to make a cameo appearance here in Building Blocks. His comment: "It's about time you found a bullish chart." Glad to oblige, Gary!

On the Road Again

Speaking of the West coast (CAP C), Building Blocks is off to the Sutro annual Western Real Estate Conference next week. This year, in balmy Tucson (not a bad assignment in February), we'll have a chance to sit down with the management teams of a number of leading REITs.

And, yours truly will take the stage with two REIT CEOs -- the director of REIT research at Sutro, and a Moody's analyst -- to talk about the future of REIT investing. (For more, see the TSC Community page). Take a look below at the companies presenting and, if you have a question, shoot me an email. Stay tuned for Sutro coverage next week.

Companies Presenting at the Sutro Western Real Estate Conference
AMB Property	Kimco Realty Properties
Apartment Investment & Management	National Golf Properties
Arden Realty	New Plan Excel Realty Trust
Bedford Property Investors	Newhall Land & Farming
Bradley Real Estate	Omega HealthCare Investors
BRE Properties	Pacific Gulf Properties
Cabot Industrial Trust	Pan Pacific Retail Properties
Camden Property Trust	ProLogis Trust
EastGroup Properties	PS Business Parks
Equity Residential Properties Trust	Public Storage
Excel Legacy	Realty Income
Federal Realty Investment Trust	Shurgard Storage Centers
First American Financial	Spieker Properties
First Industrial Realty Trust	Standard Pacific
Franchise Finance Corp. of America	The Macerich Company
InnKeepers USA Trust	Westfield America
Kilroy Realty	--