Failed REIT's Story
Offers Some Lessons

GE Capital Corp.'s deal to buy real-estate conglomerate Security Capital Corp. was announced around 9 p.m. Eastern time on Friday, Dec. 14 -- the dead of night as far as such announcements go.

The deal marked a quiet end to the grand vision of William D. Sanders, Security Capital's chairman and chief executive, who launched the company in 1991 to create the real-estate stock equivalent of Wal-Mart Stores: a blue-chip company with fully disclosed and relatively uncomplicated finances that Main Street investors understand and are comfortable with.

Instead, Security Capital grew into a tangled web of a company. It owned closely held units, pieces of public companies, a European unit with U.S. holdings, investment funds, advisory businesses and big back offices in Chicago and Santa Fe, N.M. Since going public in September 1997, its shares traded mostly well below its $28 initial-public-offering price and at discounts as high as 30% to the underlying value of the company's assets.

GE Capital, through its commercial real-estate business, agreed to buy Security Capital for about $4 billion, or $26 a common share -- a 25% premium to Security Capital's previous close, but still slightly below its estimated net asset value.

Mr. Sanders, through a spokesman declines to comment. Michael Pralle, president and chief executive of GE Capital Real Estate, says Security Capital's owns high-quality assets that fit well with the portfolio of GE Capital, a unit of General Electric Co.

Now analysts and investors are looking for lessons in Security Capital's run, what is widely regarded as a very evident failure.

One such lesson is that even a legendary industry visionary and a deal maker can miscalculate. In the 1970s and 1980s, Mr. Sanders built Chicago's Lasalle Partners Inc., now Jones Lang Lasalle, into a global real-estate advisory firm with the prestige of a Wall Street financial house. His next project, Security Capital, was even more audacious. Assembling an A-team of industry talent, he conceived the company as a venture-capital and incubation firm that would create research and capital firms in various sectors and bring them public as real-estate investment trusts.

The vision had flaws, however. It was conceived in the mid-1990s, when REITS traded at a premium to private-market asset values, meaning a set of buildings owned privately could be sold for 10% or 20% more in the public markets. But after an industry-wide slump in REIT shares in 1998 and 1999, public REITs traded at big discounts to asset values, making dollars raised privately shrink when brought public.

Adding to the problems: Mr. Sanders had mixed success rate in making a go of his REITs. Some like Security Capital Industrial Trust, now Denver-based warehouse landlord Prologis Trust, went public to provide strong returns. Others missed. Extended-stay hotel chain Homestead Village Inc., Atlanta, launched in 1998, floundered and was bought by private-equity firm Blackstone Group LLC this year.

The sale also has put into question the idea of a REIT conglomerate. Security Capital owned firms that owned parking lots, assisted-living centers, office buildings, warehouses, strip centers and more. But it derived little visible benefit from the combination. Worse, investors didn't understand the company and chose to buy shares of, say, CarrAmerica Realty Corp., the Washington, D.C., office REIT, rather than Security Capital, which owned about 30% of CarrAmerica.

A final lesson is that concentrating on shareholders wins grudging respect -- even if returns are poor. With a restructuring launched in 1999, Mr. Sanders tirelessly worked to fix the problems he created. Shares responded, climbing to the $20s earlier this year, from the low teens in 1999. And in the end, he surprised the industry by selling at nearly full value of the underlying properties to GE Capital.

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