Fruit of the Vine

By Janet Morrissey

Like a lot of people, William Hill and Dick Wollack got caught up in the real estate frenzy. But you won't find them anywhere near a Las Vegas condo. Instead, their company, Premier Pacific Vineyards, has been snapping up land in prime wine-growing areas of California, Oregon and Washington since 2002. Hill and Wollack are developing vineyards that produce high-end grapes used in premium wines. The play? Bundle their vineyards into a real estate investment trust (REIT), and take it public.

It seems counterintuitive, what with France, Italy, Spain and Australia suffering wine gluts over the past few years and the E.U. contemplating yanking out vines. Even California's Central Valley has seen 100,000 acres culled in the past five years. But the premium end of that market--wines costing $25 a bottle and up--is on a tear, with sales growth averaging more than 30% over the past three years. Bill Stevens, wine-division manager at Silicon Valley Bank, expects pricey wine to continue to grow at a double-digit pace, with grape shortages in all premium areas except Merlot, by 2008.

Investors are drinking it in. Bill Sweat and his wife Donna Morris quit their day jobs at Fidelity Investments in Boston, and last year moved to Dundee, Ore., where they bought a 20-acre vineyard, now called Winderlea, in a Pinot Noir region. The couple had long been collectors and felt the time was right to jump in. "We come from a business where you make money every day, so we didn't get into this solely because of our passion," Sweat says. "We definitely got into it because we thought we could make some money."

Even Entertainment Properties Trust, a publicly traded REIT that owns movie theaters, recently ventured into the vineyard business, purchasing at least three vineyards, all focusing on upscale grapes. Chief executive David Brain believes demographics will drive that sector for the next 10 to 15 years, and he expects average annual returns of about 10%. The demand has pushed the price per acre in Napa Valley's premium vineyards to between $200,000 and $300,000, up from between $125,000 and $180,000 in 2002, according to Tony Correia, president of Correia-Xavier Inc., a property appraiser in Fresno, Calif. Flush boomers are fueling demand, but their kids are guzzling wine at twice the rate of previous generations. So, by 2010, the U.S. will be drinking 3.8 billion bottles annually, making it the largest wine consumer in the world, predicts Silicon Valley Bank.

There are risks, of course, perhaps the biggest being agricultural. "Your harvest is only as good as God gives you," says Stevens. "Do you get two tons to the acre, or do you get five tons to the acre?" Competitive risk comes via foreign wine sales, which are gaining market share. They accounted for 29.4% of the U.S. wine sales in 2006, up from 27% in 2005, according to Silicon Valley Bank, although much of these gains were in cheaper wines.

There's also a supply-cycle risk in the industry, which tends to overproduce, often related to the timing of newly planted vines. New plantings generally take three to five years to bear enough fruit to turn a profit, and demand for a particular grape can dry up in that time. Investors are betting that high-end wine is less susceptible to oversupply, primarily because there are only limited areas in the U.S. and Europe where land and climate conditions are right for growing high-quality grapes.

Even now, it's not all wine and roses. Vintage Wine Trust, a private REIT formed in San Rafael, Calif., in January 2005, is already looking at alternatives to taking the company public. Chief financial officer Tamara Fischer says finding buyout targets and persuading wineries to sell through sale-leasebacks have been tougher than expected. "We thought we'd have $300 million invested in 18 months," she says. "But at 28 months, we only have $165 million."

Premier Pacific's Wollack says that developing vineyards, rather than having to persuade reluctant owners to sell the "family jewels," allows the company to control its growth. His company has 10 vineyards approaching maturity and 19 on the way. Wollack needs 15 to 20 mature vineyards before taking his company public--a goal he expects to reach in the next two years.