Two Bidders Compete for Arden Realty
Two of the country’s largest real estate investors are vying to buy Southern California’s biggest office landlord, Arden Realty Inc., in a deal that could top $3 billion and redistribute ownership of scores of prime office buildings.
The bids from GE Capital and Morgan Stanley Real Estate Funds reinforce the region’s standing as one of the nation’s most sought-after office markets for major real estate investors.
“There are basically three hot office markets in the country: New York; Washington, D.C.; and Southern California,” said analyst Jim Sullivan, who follows publicly traded real estate companies for Green Street Advisors, a Newport Beach research firm. “Everyone wants to invest in those three markets.”
GE Capital is considered the front-runner for Brentwood-based Arden’s 18.5 million-square-foot portfolio in Los Angeles, Orange and San Diego counties, according to people familiar with the talks. GE Capital is a unit of Fairfield, Conn.-based General Electric Co.
Maguire Properties Inc., a Los Angeles-based real estate investment trust, is waiting in the wings to buy about $1.5 billion worth of some of Arden’s 192 buildings from GE if GE wins the bidding.
New York-based Morgan Stanley Real Estate Funds, another well-capitalized national real estate investor, is the other contender for Arden’s portfolio, according to four sources, two of whom are involved in the talks and asked not to be identified because the transaction hadn’t been completed.
Among Arden’s top properties are Westwood Center, Wilshire Pacific Plaza and Howard Hughes Tower, all in Los Angeles.
Based on the sale of other real estate investment trusts this year, Arden should fetch $50 to $57 a share, said analyst Craig Silvers of Bricks & Mortar Capital.
That would value the company at $3.3 billion to $3.8 billion. The winning bidder also would take on Arden’s $1.6 billion of debt.
Arden shares closed down 92 cents Thursday at $46.20.
News of the talks was reported earlier this week by Globest.com.
Arden managers put the company on the block in the early fall, the sources said, and a sale agreement could be reached as soon as Monday.
Why would Arden executives sell the company now?
Chairman Richard S. Ziman “was stating 18 months ago that he couldn’t believe how high the prices of office buildings were here in Southern California,” Sullivan said. “Now, they’re up another 20%. I think that’s your answer.”
Ziman and President Victor Coleman, considered savvy and aggressive real estate investors, founded the company in 1991 near the end of a real estate boom and took it public in 1996, when the office market was soft and investment capital was hard to come by.
At a $50-a-share sale price, Ziman stands to gross $118.9 million based on his holdings listed in the company’s most recent proxy statement. Coleman would reap $48.6 million.
At least half of Arden’s properties are considered high-end Class A buildings, and the rest generate steady rents. The buildings were 93.1% leased at the end of the third quarter, up slightly from 92.5% at the same point a year earlier.
Although prices of Southern California offices have ratcheted up sharply in the last three years, rents have only recently begun to tick upward. In most markets, rents are still off their peak during the dot-com boom years that ended in 2001.
“They survived the downturn,” Silvers said, but Arden has been unable to cover its dividend payments with profit after capital spending for maintenance in recent quarters.
Fortunately for Arden, Wall Street “mainly looks at cash flow, which Arden has plenty of,” said Gary Mozer, chief executive of real estate banking firm George Smith Partners Inc. “Arden has been a great accumulator and a better manager than most of its peers.”
Arden also is desirable because the preponderance of its properties are on Los Angeles County’s Westside and in other Southern California markets where development is becoming more difficult because of restrictions on new construction and demand for housing.
“Every available piece of developable office land has been turned into residential” uses, Mozer said.
“Not much new supply is coming online. Arden is in a good position,” he said.
