How low can they go?

Shares of publicly traded real estate investment trusts just keep languishing, raising the prospect that at some point a deep-pocketed bottom-fisher may swoop in and take one or more of them private.

REITs have slid sideways at best since 1997, and now trade at a discount. You can buy $1 worth of commercial property for about 80 cents of REIT stock, said David Doupe, managing director with Insignia/ESG Capital Advisors Group in downtown Los Angeles.

Doupe should know; his job is to find cash to finance real estate buys. But despite the compelling fundamentals, don’t look for a privatization wave anytime soon, counsels Doupe.

“The problem is that the capital isn’t there (with private buyers). Many of these REITs, and most of the quality REITs, have market capitalizations above $1 billion, even with the discount,” said Doupe.

Indeed, Arden Realty Inc. is worth about $1.2 billion, even now. That’s a big chunk of change. The usual financiers or principals of such a large property purchase? The pension funds, said Doupe. “And they already own REIT stocks,” he pointed out.

Too, pension funds got burned in the down real estate cycle of the early ’90s, and remain leery about a repeat performance. Also, why buy property when the S & P; 500 a broad measure of blue-chip stocks has been increasing by 20 percent or more every year?

If REITs tumble another 25 percent, expect to see private buyers move in, Doupe predicted. But for now it looks pretty tepid for REITs. “The market psychology is saying that commercial real estate is as good as it’s going to get. You might get 3 percent to 5 percent (annual) appreciation in the future,” said Doupe.

Not much to get excited about.

But what cycles in, will cycle out, said Doupe. “I don’t know when, but the time will come when we will all sit around the table and ask ourselves, ‘Why didn’t we buy REIT stocks?’ ” he said.

El Segundo Swoon

Talk about a tough market for small caps.

Peerless Systems Inc., the El Segundo-based manufacturer of software used in printers, copy machines, scanners and other imaging products, is having a good enough year, with sales up 16 percent in the first nine months, to $31.1 million, and net income up 51 percent, to $3.8 million.

Peerless even has buy recommendations from Prudential Securities and Hambrecht & Quist quite a feat, as it is difficult for most small caps to get anybody to cover them.

But it hardly matters, at least for shareholders. As of last week, the stock was trading at under $9, way off its 52-week high of $16, and at an anemic 11.5 times projected next year’s earnings.

Why the weakness? This market absolutely punishes small-cap stocks that miss earnings estimates, and in late November, Peerless reported third-quarter earnings per share of 15 cents, a penny less than analysts were looking for. Forget comparisons to the year-earlier quarter, when Peerless posted earnings per share of a nickel. What counted was the missed estimate. The stock fell $4 to $8.88 that day, and has not recovered since.

Said one investment banker, “When a good small-cap company trades at 11 times earnings, what you really think about is selling it to a large-cap company that trades for 30 times earnings.”

More El Segundo Action

Warren Buffett, the legendary titan of investing and chairman of Omaha-based Berkshire Hathaway Inc., has taken a 5.3 percent stake in Bell Industries Inc., according to a 13-G filing last week. (13-G is an SEC document which indicates the investment is “passive.”) So don’t look for Buffett to, say, take a board seat on Bell, a $212.5 million (1998 sales) maker of semiconductors, electronic components for computers, and other high-tech gear.

On news of the filing Monday (Dec. 13), the stock spiked nearly 30 percent to $6.44 a share, up from $5.

Not all investors showing interest in Bell are passive. In mid-October, New York-based Steel Partners II bid $5.30-a-share for the entire company, which management rejected. Steel II already owns 17.4 percent of Bell, or about $9 million worth.

Steel Partners II was a bit, well, steely in its reply to the rebuff, and released a statement that read, in part, “It is appalling that Bell’s board of directors, after extracting millions of dollars in payments for themselves from Bell within the last 12 months, would now choose to try to remain entrenched, continue to ignore the best interests of Bell’s shareholders and disregard the opinion of Bell’s investment banker that our offer is ‘fair.’ ”

The letter added that Bell’s board had entered into “excessive” severance agreements for top officials that could exceed $7.1 million.

Bell officials could not be reached for comment.

Bond Expertise

There are all sorts of ways to raise money in Southern California, and one way is to go to Daniel Bronfman, founder of Santa Monica-based Growth Capital Associates Inc.

In the last four years, Bronfman has pipelined a cumulative $100 million in low-interest-rate loans to 25 manufacturers and other entities statewide. Bronfman’s niche is the not-glamorous-but-still-effective industrial development bond, or IDB. Indeed, Bronfman is personally involved in about one-third of all IDB bonds floated statewide each year.

Many companies do not consider IDBs a financing vehicle because of the inevitable complications and red tape when dealing with governmental entities. The bonds are backed by the state, but sponsored by local governments. But because IDBs are backed by government guarantees (meaning lenders lend at a lower rate), borrowing costs can be hundreds of basis points cheaper than conventional financing.

“I have done this enough now that I can cut the red tape pretty quickly,” said Bronfman. “It’s is a great financing tool, when used properly.”

Quick Takes

Prudential Securities in Century City last week grabbed brokers Harold Tennon, Steve Siminoff, Richard Siminoff and Harvey Collins from the nearby PaineWebber office. Pru is known for paying large upfront bonuses to get senior brokers. South Central Los Angeles-based Bonded Motors Inc., the financially ailing auto-engine rebuilder, last week struck a deal with suppliers and creditors, in which major suppliers will take back a “long-term” IOU instead of being paid. Company Chairman and CEO Aaron Landon personally put up $375,000 as collateral to sell the deal.

Contributing Columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at [email protected].