Description

SHELBOURNE PROPERTIES I, II, III
Tickers: HXD $41.10, HXE $51.40, HXF $39.00

Three high-quality, mixed-use REITs that are trading at 70% of appraised value and pay a nice dividend. Carl Icahn is seeking to take control and liquidate the assets. What more could you ask for?

Background:

Shelbourne Properties I, II and III are REITs that were formed April 18, 2001 as successor entities for three limited partnerships that were originally formed by Integrated Resources in the mid- to late-1980s. The impetus behind the conversions of the limited partnerships into publicly traded REITs was a lawsuit first brought by the limited partners against the general partners in 1993. After years of litigation, the resolution was to convert the limited partnerships and alter the preexisting general partners' fee structures. When the REIT shares first began trading,
the limited partners who had desired liquidity after holding their shares for 12-15 years dumped their shares on the market at fire-sale prices.
While the REITs were still limited partnerships, the general partners routinely wrote down the values of the properties in order to pass the resultant tax losses to the limited partners. As a result of the conversion of the entities into REITs, Cushman & Wakefield was hired to appraise the properties as of July 1, 2000. Cushman & Wakefield's appraised values of the properties are substantially higher than the current book value of the properties on all three of Shelbourne's
balance sheets. Since the conversion, only one property has been sold. Shelbourne II sold a property for $8,200,000 in December of 2001 that had a book value of only $4,669,488 and an appraised value of $8,100,000. The stocks of all three entities currently trade for about 70% of their appraised values.

NorthStar Capital Investment purchased control of the entities in August 1998 by acquiring control of Presidio Capital Corp., who acquired control from Integrated Resources as part of their Chapter 11 Reorganization in November 1994. As of the conversion date, April 18, 2001, NorthStar controlled 33.24% of Shelbourne I, 27.56% of Shelbourne II and 31.86% of Shelbourne III. NorthStar's headquarters are located at 527 Madison Avenue in New York.

February 11, 2002: Carl Icahn announces a cash tender offer for Shelbourne I, II and III at $39.15, $51.50 and $37.75 per share,
respectively. The tender offer prices represented an approximate 30% premium to the stocks' previous closing prices.

February 14, 2002: Shelbourne I, II and III announce they are purchasing the stock and asset management agreements from NorthStar for cash, preferred partnership interests and notes. (This transaction essentially stripped all of the cash from the Shelbourne companies, approximately $44MM, and put between $54.3MM and $58.3MM worth of debt on the combined
companies. Prior to this transaction, all three Shelbourne companies were debt-free and had substantial cash balances.)

February 19, 2002: Carl Icahn, citing a material change, withdraws his tender offer.

February 22, 2002: Carl Icahn files a derivative lawsuit in the State of New York seeking to rescind the NorthStar transaction. Soon thereafter, separately, at least two investors file similar lawsuits in Delaware. I am one of those investors.

April 19, 2002: Michael Ashner asks Shelbourne I, II and III for a waiver to purchase shares in all three companies in excess of the current limit of 8% per company. Ashner also lists his ownership of each company as fractionally below the 8% limit.

April 22, 2002: Lazard Feres is hired by Shelbourne I, II and III to evaluate strategic alternatives to enhance shareholder value.

You would think that after NorthStar stripped the cash from the three Shelbournes the stock of the companies would have crashed. Although the stock prices did initially decline after the announcement on February 14th, all three companies are now trading above Carl Icahn's original tender offer. But why?

Carl Icahn, according to his court filing, first became involved with Shelbourne I, II and III back in April of 2001. He bought some stock and then, towards the middle and end of 2001, he started having conversations with NorthStar about buying them out. What is interesting is that Icahn's partner in trying to buy out NorthStar was Michael Ashner. Ashner was the former executive officer of the Shelbourne REITs. If anybody knows the true value of the real estate, it is Ashner. After Icahn filed his lawsuit
Ashner and Icahn went their separate ways. Icahn filed a lawsuit and Ashner filed a 13D after purchasing additional shares even after the Shelbourne/NorthStar transaction.

The three Shelbourne companies are very easy to understand and value. Each REIT only owns between 5 and 10 properties. The properties are geographically diverse and include office, retail and warehouse property. These are properties that were purchased in the late '80s and have, for the most part, appreciated substantially in value.

Below I have split my financial analysis into two parts: pre- and post- the February 14, 2002 Shelbourne/NorthStar transaction. I also provide a synopsis of the appraised values provided to the company by Cushman & Wakefield. Assuming the transaction is not rescinded (low case), Shelbourne I, II and III are worth $63, $73 and $55 per share, respectively. Assuming the transaction is rescinded (high case), Shelbourne I, II and III are worth $67, $92 and $59 per share, respectively. Either way, the companies all pay a nice dividend that covers your cost of carry while you wait for Icahn's lawsuit to unfold. There is also a possibility that if Icahn is successful, the companies are worth even more than in my high case scenarios. According to Icahn's lawsuit, he estimates the pre-NorthStar transaction values of the combined Shelbourne entities to be $250MM. This is $33MM or about $9 more per
share than my high case values of the Shelbourne entities. If Icahn is successful in rescinding the deal and he is right about the values of Shelbourne I, II and III, the stocks today trade at about 50-60% of those values.

Pre- Shelbourne/NorthStar Transaction
SHELBOURNE I SHELBOURNE II SHELBOURNE III
Ticker HXD HXE HXF
Icahn's Tender Offer $39.15 $51.50 $37.75
Share Price (4/30/02) $41.10 $51.40 $39.00
Shares Outstanding 1,263,189 1,237,916 1,173,998
Equity Market Cap $51,917,068 $63,628,882 $45,785,922
Book Value (12/31/01) $31,783,227 $41,327,041 $43,454,478
Bal Sht Cash (12/31/01) $14,191,726 $26,011,761 $11,122,456
Book Value $45,974,953 $67,338,802 $54,576,934
Book Value Per Share $36.40 $54.40 $46.49
Appraised Value (7/00) $71,112,500 $88,519,680 $58,692,820
Bal Sht Cash (12/31/01) $14,191,726 $26,011,761 $11,122,456
Appr'd Value + Cash $85,304,226 $114,531,441 $69,815,276
Value Per Share $67.53 $92.52 $59.47

Cash Per Share(12/31/01) $11.23 $21.01 $9.47

Share Price/Appr'd Value 60.86% 55.56% 65.58%

Post- Shelbourne/NorthStar Transaction
SHELBOURNE I SHELBOURNE II SHELBOURNE III
Ticker HXD HXE HXF
Icahn's Tender Offer $39.15 $51.50 $37.75
Share Price (4/30/02) $41.10 $51.40 $39.00
Shares Outstanding 839,286 894,792 788,772
Equity Market Cap $34,494,655 $45,992,309 $30,762,108
Book Value (12/31/01) $31,783,227 $41,327,041 $43,454,478
Bal Sht Cash(4/30/02 est) $1,000,000 $1,000,000 $1,000,000
NorthStar Note (maximum) ($18,939,737) ($23,658,488) ($15,665,421)
Book Value $13,843,490 $18,668,553 $28,789,057
Book Value Per Share $16.49 $20.86 $36.50
Appr'd Value (7/00) $71,112,500 $88,519,680 $58,692,820
Bal Sht Cash(4/30/02 est) $1,000,000 $1,000,000 $1,000,000
NorthStar Note (maximum) ($18,939,737) ($23,658,488) ($15,665,421)
Appr'd Value+Cash-Note $53,172,763 $65,861,192 $44,027,399
Value Per Share $63.35 $73.61 $55.82

Bal Sht Cash(4/30/02 est) $1.19 $1.12 $1.27

Share Price/Appr'd Value 64.87% 69.83% 69.87%

Dividends Per Share (8 mo) $1.33 $2.11 $1.87

FFO: Annual (Projected) $5,559,659 $6,773,182 $4,102,011

FFO: Qtr Ended 12/31/01 $1,077,070 $1,341,155 $984,321
FFO: Qtr Ended 9/30/01 $1,147,647 $1,602,466 $1,213,131
FFO: Qtr Ended 6/30/01 $1,128,886 $1,480,307 $991,208
FFO: Qtr Ended 3/31/01 $1,628,244 $1,452,087 $1,001,508

Asset Mgt Fee-Qtr 12/31/01 $271,610 $340,477 $221,760

Notes:
(1) Dividends were paid in December 2001 for an eight-month period, Shelbourne II included gain on sale.
(2) Projected FFO was calculated based on actual LTM FFO ending 9/30/00 using pro forma mgmt fees (per the prospectus).
(3) FFO is severely penalized due to an asset management fee of 1.25% calculated on the Gross Asset Value.
- Gross Asset Value is the value of all assets owned based on the latest appraisal of real estate (not book value) and the amount of other assets on the balance sheet.
(4) The best sources of financial information for Shelbourne I, II and III include: Prospectus/Consent Solicitation filed early 2001(includes Cushman & Wakefield's analysis, occupancy rates, property descriptions, etc.), Icahn's lawsuit filed in the New York State Supreme Court, the 8-K dated 2/14/02 and, of course, the 12/31/01 10K filing.

Cushman & Wakefield's Property Valuations

SHELBOURNE I

PROPERTY TYPE OWNED OCCUPNCY BOOK VALUE APPR'D VALUE
1/1/01 9/30/00 7/1/00
Century Park I office 50% 100% $4,223,305 $10,500,000
Kearny Mesa, CA
568 Broadway office 38.925% 100% $4,875,251 $19,462,500
New York, NY
Seattle Tower office 50% 95% $2,740,592 $11,350,000
Seattle, WA
Loch Raven Plaza retail/ 100% 87% $5,712,813 $8,100,000 Towson, MD office
Southport Shopping shopping 100% 90% $14,053,952 $21,700,000
Fort Lauderdale, FL
Totals: $31,605,913 $71,112,500

SHELBOURNE II

PROPERTY TYPE OWNED OCCUPNCY BOOK VALUE APPR'D VALUE
1/1/01 9/30/00 7/1/00
Century Park I office 50% 100% $4,086,330 $10,500,000
Kearny Mesa, CA
568 Broadway office 38.925% 100% $4,633,374 $19,462,500
New York, NY
Seattle Tower office 50% 95% $2,599,865 $11,350,000
Seattle, WA
Commonwealth Industr. manuf./ 100% 100% $4,669,488 $8,100,000
Fullerton, CA warehouse (sold 12/2001 for $8,200,000)
Commerce Plaza office 100% 82% $5,037,365 $7,700,000
Richmond, VA
Melrose Crossing shopping 100% 12% $2,364,818 $3,100,000
Melrose Park, IL
Matthews Twnshp shopping 100% 63% $8,143,501 $11,800,000
Matthews, NC
Sutton Square shopping 100% 100% $10,318,930 $11,900,000
Raleigh, NC
TMR Warehouse Ind. warehse 20.660% 100% $4,462,012 $4,607,180
Hilliard, Grove, Delaware, OH
Melrose(lot #7 vacant) lot 100% 0% $0 $0
Melrose Park, IL
Totals: $46,315,683 $88,519,680

SHELBOURNE III

PROPERTY TYPE OWNED OCCUPNCY BOOK VALUE APPR'D VALUE 1/1/01 9/30/00 7/1/00 Livonia Plaza shopping 100% 91% $8,094,060 $9,250,000
Livonia, MI
568 Broadway office 22.150% 100% $3,291,315 $11,075,000
New York, NY
Sunrise Marketplace shopping 100% 92% $7,570,540 $11,300,000
Clark County, NV
SuperValu Stores retail 50% 76% $7,218,061 $7,175,000
4 locat's (GA,IN,OH,MN)
TMR Warehouse Ind. warehse 79.340% 100% $16,691,857 $17,692,820
Hilliard, Grove, Delaware, OH
Melrose Phase II retail 100% 0% $2,064,787 $2,200,000
Melrose Park, IL
Totals: $44,930,620 $58,692,820

Catalyst

(1) Carl Icahn lawsuit seeking to take control and liquidate the company (2) Lazard Feres was recently hired to enhance shareholder values
(3) Michael Ashner has asked the company to remove the 8% limitation on share ownership as he wishes to increase his holdings beyond those limits.
(3) Shelbourne I,II and III trade at less than 70% of appraised value because not a single analyst covers these companies. These companies are just simply cheap. Either Icahn, Ashner or another REIT will soon take control of these companies.