Burnham Pacific Properties

(BPP)

is looking for a suitor. Problem is, those who've come calling are offering fire-sale prices -- near the stock's low -- just seven months after the company fought off a bid that would have netted shareholders a price well above Burnham's 52-week high.

The REIT's stock has done nothing but fall after reaching a multiyear high of 15 9/16 in January 1998. With the stock wallowing around 11 last June, the company received an unsolicited 13-per-share bid from the

Schottenstein Group

. When Burnham pushed aside the offer, Schottenstein increased its bid to 13 1/2, a 15% premium over the pre-offer stock price.

After over two months of pleading by Schottenstein and near silence from Burnham, the company wrote shareholders a letter. "We believe the company you own is worth more," it said. In the communique, Burnham Chairman Malin Burnham described the proposal as unacceptable because conditions of the transaction included "due diligence which would be disruptive to your company's operations."

Burnham also wrote that the Schottenstein offer was contingent on the group receiving financing, a condition of almost any offer -- friendly or hostile.

Today, the stock has sunk to about 7 and the company is looking for options. "This is a sad example of ego-driven management," says one REIT mutual-fund analyst who follows the company but has no positions. "Job preservation is not a good reason not to sell. They had a fiduciary responsibility to maximize value. They should have taken the money and run." Burnham did not return calls for comment.

Earlier this month, Burnham announced 1999 earnings that were down 8% from 1998, a result of property sales and higher borrowing costs. Among Burnham's profit-eating expenses last year was the cost of fighting the Schottenstein offer. Total tab: about $2 million.

"They shouldn't have spent so much time and money putting obstacles in place," says the analyst, referring to a shareholder-rights plan adopted in response to the Schottenstein bid. In the letter to shareholders, Burnham justified the plan: "In our case, the shareholder-rights plan has worked exactly as planned, and we believe it factored into Schottenstein's decision to raise their proposed price to $13.50 a share." Despite the sweeter offer, however, the company engaged investment bankers to show Schottenstein the door.

One reason management may have been loath to sell: Three executives were given a bonus in stock options in 1998 that wouldn't be fully vested until 2001. The proxy does not indicate the shares would vest upon a change of control, meaning CEO David Martin could have lost 200,000 shares if the Schottenstein deal was accepted.

In June, senior executives worked quickly to secure their own futures in the event of a takeover. The company adopted a severance plan giving senior executives, including Martin, three times their annual salary and annual bonus and benefits for three years upon any change of control. While none of the executives received a performance bonus in 1998, according to the most recent proxy, the "golden parachute" takes care of that, defining the bonus as nothing less than the current annual salary of each executive.

And in August, the company adopted a "phantom" stock plan that, in the event of a sale or takeover, would grant more than 545,000 shares to senior executives, including more than 425,000 to Martin. With those plans in place, even if the company is sold for a price dramatically below the Schottenstein bid, Burnham executives will get more than they would have last June -- and shareholders will get less.

Scavenging for Morsels

The company is now left with few options and none that excite potential buyers or current shareholders. Early this year the company accepted proposals from strategic partners, purportedly looking for a friendly suitor. Burnham postponed its annual meeting until July 11, hoping that by then it can choose a partner and weave a deal.

That's the bad news. While the company would not comment, sources say the best offers appear to be around 9, well below the original offer from Schottenstein. Since then Burnham has sold two properties and its operating expenses have risen to over 30% of property revenue.

Sutro

analyst Craig Silvers estimates the value of the company's property portfolio at 9 23/32 a share and says institutional investors now value the company between 7 3/4 and 9 per share. Sutro has a hold on the stock and has banked the company.

More importantly, Silvers says, the company must either sell or investors will face more bad news: a near-certain dividend cut. He estimates the company's 2000 funds from operations -- a REIT's measure of cash flow -- to be $1.05, just equal to the current dividend, not including likely capital expenditures. "If they don't sell, it's a $6 stock at best and the dividend gets whacked," he says. "If they do sell, it's hard to imagine that shareholders will be happy."

The good news: Given the company's search for a friendly suitor, this latest saga into the dark world of REIT mismanagement appears ripe for an ending and not any too soon for most investors. "I've never seen a more disappointing story," says another REIT fund analyst. "This is a classic story of a self-obsessed management team. And, it's just another blow to the industry. You'd think they'd learn by now."

Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback at

invest@cjnetworks.com.