Investment trust taps in-house management staff.

Investment trust taps in-house management staff

Brentwood-based Real Estate Investment Trust of California, a New York Stock Exchange company, plans to establish its first in-house management staff after 22 years of operations.

The trust, which owns Los Angeles County properties valued in excess of $170 million, has been run for the past 10 years by the William Walters Co., a private advisory concern.

However, William Walters Jr., president of the firm, will retire when a new president comes on board.

The seven William Walters Co. advisors, excluding Walters himself, who have been managing the trust's portfolio under the advisory contract, will all be retained as full-time employees of the trust as soon as the trust's new president is hired.

"When a REIT gets big enough to justify hiring its own full-time, in-house staff, it usually does so," explained one REIT specialist at Merrill Lynch Research. "This is because in-house management is generally less costly than an advisory staff on retainer. Also, an in-house staff can concentrate all their attention on their employer's portfolio, whereas advisory staffs are diverted by having to juggle several clients' portfolios."

The trust has been paying Walters' advisory company about $700,000 a year to manage its portfolio.

Wall Street reacted cooly to the news of Walters' pending retirement, with the trust's stock dropping 12.5 cents a share March 1, the first trading day following Walters' announcement, to close at $14.50 a share.

Walters, who will turn 65 in two months, said last week he plans to retain his 150,000 shares, or 0.86 percent ownership, in the trust after he retires.

Merrill Lynch reported that the trust's stock is a good buy at the current $14.50 a share, nearly a 25 percent discount from the stock's estimated market value of $19 a share.

The liquidation value of the trust's net assets is $24 a share, the securities firm estimated.

Real estate investment trusts, or REITS, were formed by the federal government as a vehicle for small investors to invest in real estate without incurring double taxation. Earnings from REITS are passed directly through to shareholders, who then pay personal taxes on those earnings. No corporate taxes are paid by REITS.

REIT of California currently owns 31 properties, 27 of which are located in Los Angeles County. Nearly all of them are shopping centers or apartment buildings.

Future growth in cash flow will continue to come mainly from rental rate increases that the trust can charge its tenants, many of whom are on short-term leases that can be frequently renegotiated at higher rates.

The trust can also increase its cash flow by acquiring additional properties at positive spreads over its cost of funds. With the L.A. area's commercial property prices being so inflated, however, significant cash flow growth from additional purchases appears unlikely.

Merrill Lynch estimated the trust's 1990 earnings at about $20 million, or $1.15 a share.

"Strong Southern California real estate market should allow the REIT to keep its properties fully leased and to realize strong levels of appreciation on its portfolio of real estate," the Merrill Lynch report stated. "William Walters Jr. has maintained a conservative balance sheet, with long-term debt currently consisting of only $21.1 million of mortgages."