SCHEDULE 13D
Under the Securities Exchange Act of 1934
(Amendment No. 1)
First Union Real Estate Equity and Mortgage Investments
(Name of Issuer)
Shares of Beneficial Interest, $1.00 par value
(Title of class of securities)
337400105
(CUSIP Number)
Stephen Fraidin, P.C.
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
(212) 859-8140
(Name, address and telephone number of person authorized to
receive notices and communications)
July 14, 1997
(Date of event which requires filing of this statement)
If the filing person has previously filed a statement on Schedule
13G to report the acquisition which is the subject of this
Schedule 13D, and is filing this schedule because of Rule 13d-
1(b)(3) or (4), check the following box [ ].
Check the following box if a fee is being paid with the statement
[ ]. (A fee is not required only if the reporting person: (1)
has a previous statement on file reporting beneficial ownership
of more than five percent of the class of securities described in
Item 1; and (2) has filed no amendment subsequent thereto
reporting beneficial ownership of five percent or less of such
class.) (See Rule 13d-7.)
Note: Six copies of this statement, including all exhibits,
should be filed with the Commission. See Rule 13d-1(a) for other
parties to whom copies are to be sent.
* The remainder of this cover page shall be filled out for a
reporting person's initial filing on this form with respect to
the subject class of securities, and for any subsequent amendment
containing information which would alter disclosures provided in
a prior cover page.
The information required on the remainder of this cover page
shall not be deemed to be "filed" for the purpose of Section 18
of the Securities Exchange Act of 1934 ("Act") or otherwise
subject to the liabilities of that section of the Act but shall
be subject to all other provisions of the Act (however, see the
Notes).
<PAGE>
SCHEDULE 13D
CUSIP No. 337400105 Page 2 of 3 Pages
This Amendment No. 1 amends and supplements the statement on Schedule 13D
(the "Schedule 13D") filed by Gotham Partners, L.P. and Gotham Partners II, L.P.
(Gotham Partners, L.P. and Gotham Partners II, L.P. are collectively
referred to hereinafter as the "Reporting Persons"), relating to shares of
Beneficial Interest, par value $1.00 per share, of First Union Real Estate
Equity and Mortgage Investments, an Ohio business trust (the "Company").
1. Item 4 of the Schedule 13D, "Purpose of the Transaction," is hereby
amended by adding the following:
"On July 14, 1997, the letter attached hereto as Exhibit 6 and
incorporated herein by this reference was sent to the Trustees of the
Company and the Directors of First Union Management, Inc.
"Except to the extent indicated in this Item 4, neither of the
Reporting Persons has any plans or proposals which would relate to or result in
any of the matters set forth in items (a) through (j) of Item 4 of Schedule
13D."
2. Item 7 of the Schedule 13D, "Material to be Filed as Exhibits," is hereby
amended by adding the following:
"6. Letter, dated July 14, 1997, to the Trustees of the Company and the
Directors of First Union Management, Inc."
<PAGE>
Page 3 of 3 Pages
After reasonable inquiry and to the best of our knowledge and belief, the
undersigned certify that the information set forth in this statement is true,
complete and correct.
Dated: July 15, 1997
GOTHAM PARTNERS, L.P.
By: SECTION H PARTNERS, L.P.,
its general partner
By: DPB CORP.,
a general partner
By: /s/ David P. Berkowitz
David P. Berkowitz
President
GOTHAM PARTNERS II, L.P.
By: SECTION H PARTNERS, L.P.,
its general partner
By: DPB CORP.,
a general partner
By: /s/ David P. Berkowitz
David P. Berkowitz
President
July 14, 1997
BY OVERNIGHT MAIL AND FAX
Mr. James C. Mastandrea
Chairman/President/CEO
First Union Real Estate
55 Public Square, Suite 1900
Cleveland, OH 44113
To: The Trustees of First Union Real Estate Equity and Mortgage Investments
The Directors of First Union Management, Inc.
As you may know from our recent 13D filing, we have a substantial investment
in First Union Real Estate Equity and Mortgage Investments ("FUR" or "the
Company"). We are writing to you because we believe the Company has
significant unrealized equity appreciation potential which is unlikely to be
realized under the Company's current leadership.
In light of the Company's recent dramatic change in strategic direction, we
believe that it is appropriate for the Board to determine whether the
Company's newly proposed strategic plan is the best plan to maximize share-
holder value after considering all alternatives. We believe it is similarly
appropriate for the Board to assess whether existing management possesses the
skills required to implement the Company's intended strategic plan.
We have outlined the four primary reasons for our concerns below.In addition,
we describe the value-maximization strategies chosen by the other paired-
share* REITs because we believe they provide a good background for the
Board's consideration. We conclude by discussing current management's
responses to value-maximizing suggestions we have made and, in light of
management's response, our proposed future course of action for the Company.
I. Management Appears to have been Unaware of the Company's Corporate Structure
FUR's strategic direction has changed dramatically in recent months due to
the discovery by the Company's shareholders of FUR's unusual and potentially
valuable stapled-stock corporate structure. As recently as the Company's
convertible preferred stock offering on October 23, 1996, the Company's "five
- -year strategic plan" consisted of "renovating the properties, repositioning
the asset portfolios through targeted acquisitions and dispositions, and
improving the operations of the Company (Preferred prospectus, page S-3)."
On the road show for the convertible offering in October, management stated
that the Company was targeting acquisitions of shopping malls and apartments
and intended to dispose of the Company's office portfolio. Management made
no mention of the Company's stapled-stock structure on the road show nor did
it announce any plans to make acquisitions of parking lots or operating
companies. As part of its stated acquisition strategy, the Company, after
completion of the offering, purchased a 146-unit apartment complex on
December 11, 1996.
Unlike the strategic plan disclosed in the Company's convertible prospectus
offering circular, the Company's strategic plan announced on May 27, 1997 at
its road show in New York was materially different. Mr. James C. Mastandrea,
the Company's chairman, chief executive officer, and president, publicly
indicated that maximizing the value of the Company's paired-share structure
was part of FUR's five-year strategic plan that he claimed to have formulated
more than one and one-half years ago (i.e., in late 1995.) When Mr.
Mastandrea was questioned by shareholders as to why the Company did not
promote its unusual and preferential corporate structure during the preferred
offering, he replied, "We did not want new shareholders to buy the stock for
the wrong reason." Despite this concern, it is noteworthy that beginning
December 4, 1996 the Company changed its tag line on all of its press
releases from:
First Union Real Estate Investments (NYSE: FUR) is an equity real estate
investment trust (REIT) specializing in repositioning real estate to extract
intrinsic value (October 24, 1996 company press release).
to:
First Union Real Estate Investments (NYSE: FUR) is the only equity real estate
investment trust (REIT) with a "stapled stock" management company, First Union
Management, Inc. First Union together with its management company special-
izes in repositioning a variety of real estate property types to extract
intrinsic value (December 4, 1996 company press release).
If, indeed, the Company's strategic plan previously had been to maximize the
value of the Company's stapled-stock structure, then investors in the
Company's preferred offering were not properly informed of the purpose for
which the Company raised equity. The Company's use of a material amount of
its available capital to purchase the $312 million Marathon mall portfolio on
October 1, 1996, when that acquisition did not in any way allow the Company
to benefit from its stapled-stock structure, is a further indication that use
of the structure was not part of the Company's strategic plan.
After the Company's stapled-stock structure was noted by investors who care-
fully reviewed the fine print in the "Federal Income Tax Considerations"
section at the back of the prospectus for the preferred offering, management
apparently revised its publicly disclosed strategic plan**.
According to the Company's May 28, 1997 prospectus, "The Company's primary
business focus will be to acquire parking structures and surface lots
throughout North America and to sell non-core assets (page S-3)." The
Company's first step in its new strategic plan was to acquire a controlling
interest in Imperial Parking Limited.
It is troubling that management was apparently unaware of the Company's value
- -enhancing corporate structure and disconcerting that management has been
unwilling to acknowledge its prior ignorance of the structure. In fact,
disingenuous statements by management have caused us to question management's
motives.
II. Overpayment for Imperial Parking Acquisition
Based on management's recent actions as well as its background and
experience, we do not believe that management possesses the requisite skills
to successfully implement the Company's strategic plan. This lack of
experience is demonstrated in part by management's pursuit and acquisition of
Imperial Parking.
We believe that the price paid by FUR for Imperial Parking was well in excess
of the fair market value of the company. We arrive at this conclusion by
comparing (1) Imperial's acquisition multiple with that paid for Allright
Parking, a superior parking company which has real property parking assets in
addition to a third-party management business, (2) by considering the after-tax
yield FUR will earn on the price paid for the business, and (3) by comparing
the price paid by FUR with the price paid by Onex, the seller, to take
Imperial private less than one year before.
FUR paid approximately 17 times 1996 fiscal year EBITDA for Imperial Parking
Ltd. in April of 1997. A group comprised of Apollo Real Estate and AEW
Realty Advisors paid less than 10 times 1996 fiscal year EBITDA for Allright
Parking in October of 1996. While the acquisition multiple paid by FUR looks
high by comparison, it is even more extreme when one compares the two companies.
Imperial and Allright are comparable in some respects. Both are dominant
parking management companies in their respective markets. Allright, however,
has several materially superior qualities to Imperial. Among other factors,
Allright generates more than five times the EBITDA that Imperial generates
and 55% of Allright's EBITDA is from parking lots it owns. Most
significantly for FUR, Allright can be acquired by the REIT entity of a
stapled-stock REIT, allowing a significant component of the company's
earnings to be shielded from corporate level taxation. Because Imperial
Parking does not own the properties it manages, it cannot be acquired by the
REIT entity of a stapled-stock company, and therefore does not offer FUR the
benefits associated with being a stapled-stock REIT. In addition, because
Imperial does not own the parking lots it manages and has typically short-
term management contracts, there is significantly greater uncertainty
associated with the stability of its future revenue streams. In light of
Imperial's absence of real estate assets, smaller size, and less stable
revenue stream, we believe that FUR should have been able to acquire Imperial
at a significantly lower multiple of cash flow than that paid for Allright.
Despite management statements about the Imperial acquisition being only
slightly initially dilutive, we believe the acquisition will be materially
dilutive to FUR. We estimate that the Imperial acquisition will generate an
initial unleveraged, after-tax yield of less than 4% on FUR's C$105 million
investment. Management and analysts have described the acquisition impact on
the Company on a pre-tax funds from operation (FFO) basis, but because FUR
will be taxed on Imperial's earnings, only an after-tax analysis is
appropriate.
We believe that management was forced to pay a tremendous premium for
Imperial Parking because the business, which had only recently been acquired
by the then current owner, was not officially for sale. Onex Corp. had
acquired Imperial Parking for a price of approximately Canadian $60.5 million
in a going-private transaction completed in June of 1996. In April of
1997, FUR paid Canadian $105 million, a more than 65% premium to the takeover
premium price paid by Onex less than one year before.
Because the price paid for acquisitions, particularly in an acquisition-
intensive company, is a critical determinant of the returns earned for share-
holders, we are extremely concerned about the execution of future
acquisitions by the existing management team.
III. Management has Diluted Shareholders with Poorly Executed Equity Offerings
Management's ability to raise equity successfully is a critical requirement
for shareholder value maximization. The timing, amount, structure and prices
of equity offerings will significantly affect shareholder risk and return in
the future.
In October 1996, FUR raised equity for the first time in nearly twenty years.
Management's execution of its preferred-stock offering and two follow-on
common stock offerings indicate that management lacks sufficient experience
to execute an optimal capital-raising program.
In a recent press release, the Company promotes as an accomplishment that it
has raised equity three times since October of 1996. The press release does
not make reference to the pricing, structure, and timing of the offerings.
We believe that all three offerings were ill-timed and poorly executed - the
first offering because of management ignorance of the Company's stapled-
stock structure, the second and third offerings because of management's
efforts to dilute the ownership stake of certain substantial shareholders of
the Company.
The first $57.5 million equity offering was for preferred equity convertible
into common stock at $7.5625, a price which was, and remains, significantly
below the Company's real estate net asset value per share, not including any
value for the Company's stapled-stock structure. Raising $57.5 million of
convertible preferred stock at a substantial discount to net asset value is a
desperate act of a distressed REIT. Management, however, did not seem to be
aware that the pricing of the offering was not favorable, nor did it give any
indication that the proceeds of the offering were to be used to acquire
operating businesses:
This is the first time First Union has been to the equity market since 1977.
The successful completion of this offering, reflected by the favorable pricing
and strong demand, is evidence that the market supports our strategic plan to
reposition assets to maximize total return to shareholders
(James C. Mastandrea, October 24, 1996 Company Press Release).
Had the Company been aware of the implications of its stapled-stock structure
and actively promoted the structure's value, we believe the offering could
have been accomplished at a significantly higher price.
Four months later on January 28, 1997, the Company sold $47.4 million of
common equity at $12.125 using an offering memorandum which directly promoted
the Company's stapled-stock structure: "First Union also intends to utilize
its stapled stock structure to maximize the total return to First Union
shareholders... (p. S-7)." The offering was accomplished without a road
show or any public announcement (until after the offering was completed), and
without the knowledge of most of the major shareholders of the REIT. Despite
the fact that the stock was well bid for in the public market at $13.125 on
the date of the completion of the offering, management sold stock to
previously uninvolved investors at $12.125 per share, a $1.00 discount before
including the $0.303 underwriting discount.
The Company's third equity offering in eight months was achieved at a price
significantly below the stock's trading price for several weeks prior to the
offering. This common stock offering was completed at $12.50 when stock had
been trading at $14.00+ per share until word of the impending offering spread
on Wall Street.
One might reasonably ask why the Company, despite hiring well-regarded
investment bankers, executed these offerings so poorly. Based on the
secretive nature of the second offering and the inopportune timing of the
third offering, we believe the primary reason for the structure and timing of
these offerings was to dilute the voting stake of certain major shareholders of
the Company regardless of the most effective means, timing, and price for
raising equity. Had management been interested in raising equity at the
highest possible price, we believe the Company would have solicited the
participation of the Company's largest shareholders.
Management's demonstrated inability to execute an optimal equity capital
raising program and its indifference to the dilution of existing shareholders
raise significant concerns about management's ability to implement its
strategic plan to maximize the value of the Company's stapled-stock structure.
IV. Management Lacks the Requisite Background and Experience
Even if one were to ignore management's poorly executed equity offerings and
the Company's overpayment for Imperial Parking, we believe that an exam-
ination of management's background and experience casts significant doubt on
its ability to manage an acquisition-intensive operating business.
In order to maximize the value of the Company's structure, management has
acknowledged that the Company must invest substantial capital in numerous
acquisitions of real-estate-intensive operating businesses at attractive
prices while simultaneously seamlessly combining these organizations into the
Company's existing base of operations. Management has affirmed these
requirements by announcing an intention to complete $700-800 million of
parking acquisitions over the next three years. The skills required for the
Company's recently revised plan to conduct an acquisition-intensive invest-
ment program are materially different from those required under its prior
plan to renovate and reposition an existing portfolio of shopping center and
office assets.
Current management's background and experience is primarily that of real
estate asset management with very limited real estate acquisition experience.
Because of the Company's overleveraged balance sheet and underperforming
assets over the past several years, the Company did not have an opportunity
to complete a significant number of acquisitions and attract an experienced
acquisition team.
The oversight and guidance for existing management is provided by
Mr. Mastandrea. Mr. Mastandrea was hired by the Company to replace the
retiring chairman and to assist the Company in turning around its troubled
real estate portfolio. Renovating, leasing, and repositioning shopping
centers require different skills from those required to implement the
Company's current strategic plan. Operating company acquisition and
management experience do not appear to be present in Mr. Mastandrea's resume.
A review of Mr. Mastandrea's background indicates that prior to joining FUR,
he was primarily a single family home builder and real estate consultant.
The existing senior management of the Company, prior to the purchase of
Imperial Parking, had never made an acquisition of an operating business. We
believe the acquisition of Imperial Parking, particularly the price paid,
demonstrates management's inexperience in acquiring operating companies.
Management has actively promoted the rise in the Company's share price since
October of 1996 as evidence that Wall Street approves of management and the
Company's strategic plan. In contrast to management's statements, we believe
that Wall Street's acceptance of these offerings and the stock's substantial
appreciation have been largely driven by investors' discovery of the
Company's stapled-stock structure and their belief that the board of
directors will pursue a value-maximization strategy similar to the other
paired-share REITs. Speculation concerning investor interest in the Company,
fueled by Apollo Real Estates 13D filings, have also likely contributed to
the stock's appreciation.
We do not fault management for lacking the required experience to implement
the current plan because senior management was hired to execute the Company's
prior strategic plan. We do, however, fault existing members of management
for attempting to implement a strategic plan for which they lack the
requisite experience. In light of our concerns, we believe the Board should
consider the value-maximizing strategies of the other paired-share REITs
outlined below.
Value-Maximization Strategies the Board Should Consider
We believe that an analysis of the shareholder value-maximization techniques
of the other three paired-share REITs will be useful in assisting the Board
in identifying the best shareholder value-maximization approach for the Company:
Hotel Investors Trust/Hotel Investors Corp. was an over-leveraged, nearly
defunct paired-share REIT when Starwood Capital Group agreed to contribute
its hotel assets to the REIT in December 1994 in exchange for paired-share
units in the company's recently formed UPREIT. The companies were renamed
Starwood Lodging Trust.
Since Starwood Lodging Trust's recapitalization, Barry Sternlicht, Chairman
of Starwood, and a newly-identified, extremely experienced management with
substantial hotel operating and acquisition experience have acquired numerous
full service hotel assets at attractive prices. Starwood Lodging Trust has
raised equity capital in a series of carefully-timed offerings at prices
which have been minimally dilutive to shareholders. The share price of Starwood
Lodging Trust has appreciated from approximately $10.00 per share in late
1994 to over $44.00 per share today. The success of Starwood has attracted
significant interest in the three other remaining grandfathered paired-share
REITs.
California Jockey Club/Bay Meadows Operating Company is a paired-share REIT
whose business was primarily owning and operating the Bay Meadows Race Track.
In August of 1996, Hudson Bay Partners, L.P., an entity affiliated with
Crescent Real Estate Equities and Richard Rainwater, made a recapitalization
proposal to Cal Jockey whereby Hudson Bay would invest $300 million to
purchase new equity in the Companies. Other interest in the REIT encouraged
its board to hire an investment banker to solicit other proposals from
interested parties. In October of 1996, Cal Jockey selected Patriot American
Hospitality as the winning bidder with its $33.00 cash or stock offer. From
the time the Hudson Bay offer was made public, the stock has appreciated from
approximately $17.00 per share to in excess of $44.00 today. Gotham Partners,
L.P. and Gotham Partners II, L.P. had a combined 6.3% stake in California Jockey
Club prior to the Patriot offer.
Santa Anita Realty/Santa Anita Operating Company (the "Santa Anita Companies"
or "SAR") is a paired-share REIT whose business was primarily owning and
operating the Santa Anita Race Track in Arcadia, California as well as a
small portfolio of shopping centers, office buildings, and apartments. In
August of 1996, the Santa Anita Companies agreed to sell $138 million of
stock to Colony Capital, a well-regarded real estate opportunity fund. At the
time of the Colony offer, SAR's stock was trading at approximately $13.50 per
share. The Colony proposal precipitated significant interest from other
investors. Ultimately, Morgan Stanley held an auction which was won by
Meditrust, a health care REIT, which offered stock consideration valued at
$31.00 per share. Gotham Partners, L.P. was part of a losing bid to acquire
control of Santa Anita.
In summary, by examining the value-maximization strategies of the boards of
directors of the other three paired-share REITs, we conclude that shareholder
value maximization is best accomplished by attracting new investors with the
skills and access to deal flow required to maximize the value of a paired-
share REIT's structure and the willingness to invest substantial equity
capital in the Company as a demonstration of their commitment to value-
maximization.
Management's Response to Shareholder Value-Maximization Proposals
In conversations with management in which we have suggested potential partners
to assist the Company in achieving shareholder value maximization,
Mr. Mastandrea has indicated to us that, regardless of the potential for
shareholder value maximization, he is unwilling to consider any proposal to
the Company which does not allow him to remain in control of FUR.
We have suggested to Mr. Mastandrea that he consider adding some of the
Company's significant shareholders to the Board, which would likely give the
substantial owners of the Company greater comfort in FUR's ability to
implement its strategic plan. Mr. Mastandrea has responded by indicating
that he is unwilling to consider the addition of any of FUR's major share-
holders to the Board.
We have suggested that the Company could acquire significant management talent
and attractive assets by using its stock (or operating partnership units in a
newly-formed UPREIT) as a currency for the acquisition of a real-estate-
intensive operating business. Mr. Mastandrea has responded that he is
unwilling to consider any transaction which would give an outside investor a
substantial interest in the Company even if the acquisition were structured to
preserve the Company's important tax characteristics.
Unlike the management and boards of directors of the other paired-share REITs,
the management of FUR has adopted a "go it alone" strategy in its approach to
shareholder value maximization. In adopting this strategy, we believe that
the current management has overestimated its capabilities and underestimated
the experience and skills required to maximize the Company's value.
Ultimately, we believe that the current management is not objective in
evaluating its abilities to manage the Company going forward.
Our Proposal for the Future
Mr. Mastandrea has accused us and other shareholders of the Company who question
the Company's current management experience and strategic plan of being short-
term opportunists. Speaking for Gotham, this is false. We are not seeking,
nor would we accept, greenmail. Gotham is not a short-term trading fund,
nor are we risk arbitrageurs. Rather, we seek investments which offer high
rates of return over a many-year holding period. We have learned from the
example of Warren Buffett to seek investments in great businesses managed by
people whom we like, trust, and admire, which we can hold forever. Please
help make First Union a permanent investment for Gotham Partners and all of
FUR's shareholders.
We believe there is tremendous potential value in First Union. We urge you to
unlock that value by replacing management with new leadership that is
committed to utilizing the stapled-stock structure in an effective and value-
enhancing manner, has relevant and credible experience, and views
shareholders as an important constituency, not as an adversary.
We would like to meet with you to discuss these concerns further as well as
answer any questions you may have.
Very truly yours,
Gotham Partners, L.P.
Gotham Partners II, L.P.
______________________
William A. Ackman
______________________
David P. Berkowitz
* In this letter, we use "paired-share" and "stapled-stock" interchangeably to
refer to those REITs which were grandfathered under the tax law to permit
their remaining "stapled" after June 30, 1983.
** An electronic text search of First Union's public filings for the previous
ten years reveals that there is no other reference to FUR being a stapled-
stock company in any of the Company's public filings.
