In many respects, it has evoked reactions similar to those one would experience from the passing of a close friend: a sense of emptiness, recollections of good times gone by, the need to push on toward the future.
For W. Pearce Coues and his colleagues at Boston-based MGI Properties, however, it is not a person whose demise over which they are commiserating, but rather the real estate investment trust itself, which ceased to exist two weeks ago after nearly 30 years in business. Focused on a mix of industrial, retail and office properties, MGI was liquidated at the behest of Coues and his board after they determined the REIT’s stock prices did not reflect the overall value of its holdings.
The original decision to dissolve, virtually unheard of for a healthy, successful company, was voted on by shareholders two years ago this week. As the entity enters its final stages, with just two properties out of 65 left to trade, industry observers and MGI Chairman Coues are now finally reviewing the results. Both externally and internally, the outlook is mostly favorable.
“It was a remarkable play,” said George J. Fantini Jr., a real estate financing specialist and founder of Fantini & Gorga. “The stockholders really benefited tremendously.”
“I think the shareholders are very pleased,” agreed Coues, with MGI’s stock trading at about $23 per share when the plan was first announced versus a final payoff of just under $30 per share. “The numbers are excellent numbers.”
Having spent more than a quarter-century at the firm, Coues acknowledged that it was a difficult path to pursue, but he continues to stand by the decision. He and other board members had become increasingly frustrated over the stagnation of MGI’s stock in the mid-1990s. Always considered a well-run, opportunistic operation, the REIT nonetheless failed to pique the interest of analysts, who were more focused on vehicles exceeding $1 billion in assets.
In retrospect, Coues said he believes MGI was hurt not only by being a mid-sized REIT, but the diversification of its assets also were not looked upon favorably. The firm’s policy of paying a low dividend may have been a factor as well. Wall Street, according to Coues, favors big dividend-yielding REITs, even though he said that makes it harder to keep properties from falling into disrepair.
“As long as the market penalizes smaller trusts, I think they will continue to have a problem,” said Coues, who insists that the notion of bigger being better is overblown. Although the cost of capital is lower for larger REITs, Coues said he believes the operational efficiencies are not as great as some proclaim, adding that one also risks losing the sense of entrepreneurship and local market knowledge by getting too large.
“This obsession for size in the REIT industry is, I think, misguided,” said Coues. “Some of the smaller trusts have performed very, very well, but they usually don’t get the recognition they deserve.”
That essentially was the quandary facing MGI in the spring of 1998 when Coues and the board first floated the plan. In many respects, the timing was fortuitous, given that the REIT industry hit a roadblock later that summer after global economic fears cast a chill on Wall Street. Prices of properties were also nearing replacement costs, Coues recalled, making it more difficult to find prudent investments.
Had MGI not made the announcement, the stock likely would have followed suit with the rest of the REIT industry, which saw total returns drop 18.8 percent in 1998 and another 6.5 percent the following year. Rather than dip into the teens, however, as Coues predicts it would have, MGI’s stock jumped into the $27 range upon the announcement to sell its assets.
“The effect on our stock was immediate,” Coues recalled. “The market clearly liked what we did.”
Coues and the board could most likely have worked out a merger with another REIT, but he noted that the unified company probably also would have lost value. In addition, he said, “Mergers can be tricky. There tends to be hidden baggage.”
“I think the better alternative was to consider a liquidation,” Coues said.
That is not to say there wasn’t some convincing that needed to be done. Some board members were initially reluctant, Coues said, but in the end, the group determined it made the most sense. “The board was always very willing to move the company on a strategic basis, and was always dedicated to the interests of the shareholders,” he said.
‘That Ain’t Bad’
Within a year of the shareholder vote, bolstered by a $400 million sale of several New England properties to Boston Capital, MGI had returned about $29 per share to its investors. Had they so desired, Coues noted, the shareholders could have taken that money and reinvested it in depressed REITs, providing further value.
In certain respects, the recent improvement in the REIT market has led some to questions MGI’s strategy, including analyst Frederick Carr of the Penobscot Group. A longtime admirer of Coues’ business acumen, Carr nonetheless said the REIT rebound, coupled with a dramatic increase in New England’s commercial rents, has some questioning the MGI approach.
“It has looked at various points of time like a smart move. It hasn’t always,” said Carr. “It was the right decision in the short run, but that’s not as clear today … It looks a little more neutral now; neither good nor bad.”
Fantini, however, maintains that the disconnection between large and smaller REITs may have kept MGI’s stock from rebounding on the tide of the industry resurgence, while Coues said at best the stock probably would have come back to the level at which it finally was liquidated. Returns in the 12 to 15 percent range likely would have fallen to around 10 percent at the depths of the market, he added, making it unclear what the price would be at present.
“If they were saying that in four or five years you may go up to $29 [per share] versus liquidating [to that level] in a year, the liquidation carries a lot of favor,” Coues said.
Fantini concurred, recalling the frustration Coues voiced with the stock’s stagnation prior to the announcement. Fantini also said he believes the liquidation process was handled professionally and quickly, adding that it may serve as an inspiration to REITs in similar situations.
“Everything [Coues] said would occur did occur, and I’m sure there are a lot of other REITs out there who have observed what he and his company have done and wonder whether they should do it themselves,” Fantini said.
To Coues, the end result also justifies the means, noting that anyone investing $10,000 in MGI when it was founded in 1971 would today have yielded $620,000. “That ain’t bad,” said Coues. “I think all of us should be very proud of it.”
With the formation of the MGI Properties Liquidating Trust, Coues and other staffers are now in the process of wrapping up the final property sales and tying up loose ends, something that should take about a year. The cessation of trading on the stock exchange was difficult, Coues acknowledged, calling it “an empty feeling.”
“It was very tough on our employees,” he said. “I miss it, I think the board misses it and our staff misses it. But I’d rather leave it the way we did than ride it down.”
As for himself, Coues said he has not yet decided his next move, although he pledged that he will not be heading for Hawaii or some other vacation resort, at least not permanently. “I will do something,” he said. “I love working, and I do not want to quit.”
