Ciatti VITAL STATISTICS: Vintage Wine Trust Inc. ADDRESS: 1101 Fifth Ave., Suite 310 San Rafael, Calif. 94901 PHONE: (415) 456-0420 WEB SITE: www.vintagewinetrust.com KEY EXECUTIVES: Joseph Ciatti, chief executive officer; Tamara Fischer, chief financial officer; Richard N. Shell, chief operating officer

By Allen Kenney

Driving through the heart of Napa Valley, oenophiles can survey the surrounding landscape and find nothing but vineyards. Sipping on merlot and cabernet, it's easy to forget all of the hard work necessary to create the swaths of sprouting vines that cover 500,000 acres of California land. Before the first seeds are even planted, winemakers must ensure that everything from the soil to the climate to the air quality of a site is perfect for cultivating their grapes.

Recognizing the value in such specialized property, private REIT Vintage Wine Trust has decided to parlay its substantial expertise in fine wine into real estate investing. Today, it is the only domestic REIT that focuses strictly on the wine industry, which brings a unique set of challenges—and rewards—to its operations.

Deep Roots

Chief Executive Officer Joseph W. Ciatti doesn't bring an extensive real estate background to Vintage Wine Trust, but he has a long lineage in wine. Shortly after the end of the Prohibition Era, his grandfather started the Geyser Peak Winery, which Ciatti's family continued to operate for almost 40 years before selling it to a worldwide liquor company in 1971. Ciatti then turned to wine and grape brokerage, building his eponymous company into the largest of its kind in the world, with offices dotting the wine hotspots around the globe, including Argentina, France and Australia.

The Huichica Hills vineyard in the Carneros region of Napa Valley, Calif.

Ciatti's brokerage business led him to dealings with wine industry players of all shapes and sizes, from global conglomerates to quaint mom-and-pop wineries. His reputation has garnered him access to key industry executives both at home and abroad.

"I grew up with a lot of the people in the industry and dealt with almost everybody in the California arena and the global picture as well," he says. "I certainly wasn't a REIT person."

Investment banking company Friedman, Billings, Ramsey Group approached Ciatti in 2004 about a new business venture modeled after an Australian company, Beston Wine Industry Trust (now owned by Challenger Financial Services and known as Challenger Wine Trust). Real estate industry players had long toyed with the idea of a wine REIT, but Vintage turned out to be the first to actually take the plunge.

"It was an intriguing concept, and I thought that it could work," Ciatti says of his reaction when first told about the idea of a wine-only REIT. "There has always been talk during the last 10 years that there should be REITs in the wine industry. We just have taken it to the next step."

Ciatti became more and more involved with Vintage Wine Trust, eventually ceding total control of his brokerage business to his son. Vintage Wine Trust wrapped up a private equity offering of $160 million in common stock in March 2005, strictly for the purpose of investing in vineyards and other wine-related assets. Prior to that, Ciatti had toured the country on a campaign to drum up interest in his unique new offering.

(Above): Vintage Wine Trust’s winery on Corbett Canyon road in San Luis Obispo. Calif.”

Picking and Choosing

Today, Vintage Wine Trust owns 6,000 acres of vineyards and two wineries. However, despite his lengthy experience in the wine industry, Ciatti and the company's nine-person staff do little of the actual operation of the REIT's assets. Instead, Vintage often engages in typical sale-leaseback transactions. The company also leases its assets to third parties.

"We generally stay away from the operations of our assets," says Chief Financial Officer Tamara Fischer, who previously served in the same capacity with residential REIT Chateau Communities prior to coming to Vintage. Fischer says that aspect of the company's business makes it different from her previous experience.

Likewise, rather than trying to develop new assets, Vintage Wine Trust has focused primarily on acquiring existing properties. That includes vineyards, wineries and any other buildings and properties related to the wine industry. However, a grape market that was supply heavy in the earlier part of the decade has "stabilized," according to Ciatti, as the demand for grapes has gradually caught up. Such shifts in market dynamics have prompted Vintage to begin slowly exploring development opportunities.

"Generally speaking, one would expect this period of stabilization to continue and eventually evolve to a period where demand will exceed supply, increasing values for growers and suppliers of bulk wine throughout the state," Fischer says.

The Sweetwater vineyard near King City, Calif.

Worldwide Wine Collection?

As a wine business veteran, Ciatti maintains that Vintage Wine Trust fills a previously unmet need for the industry. Working with Vintage, wine companies have access to full financing, enabling them to maintain control of their operational assets and simultaneously access capital to fund growth ventures. "There is a need for this type of format in the industry, both with large, public wineries and the private sector," he says.

Vintage never tries to acquire a property without already having a designated tenant—either the existing owner or a third party—in place. In addition, the company analyzes the property to ensure that it will be profitable for the company taking on the lease.

Ciatti claims that this simple two-step strategy can be molded to fit anywhere in California, not just Napa and Sonoma. "We like the diversification," he says.

The approach also has enabled the company to expand its holdings beyond the California borders, moving into Oregon and Washington, Ciatti says. Fischer says Vintage plans to move forward with an "aggressive acquisition strategy in 2008 and beyond," and both Fischer and Ciatti hint that even bolder moves might be in store for the company in coming years.

"With 4,600 growers and 1,600 wineries in the State of California alone, we see no shortage of domestic acquisitions available to us in the near future. However, if an opportunistic acquisition in Chile, Argentina or Australia, for instance, were to present itself, we would most certainly be interested in building our portfolio globally," Fischer says.

"We haven't gone global yet, but we have that capability if and when we want to," Ciatti says.