Hurry Up and REIT? No Thanks, Many Decide

With cash-rich real estate investment trusts seemingly buying up everything that’s nailed down, many private real estate companies forced to compete with REITs have had to ask themselves whether to join the crowd.

REITs are so pronounced a force that the prestigious Urban Land Institute has invited Lincoln Property Co. President Preston Butcher to speak in April about why his San Francisco-based company will not convert to a REIT.

For Butcher, a 30-year veteran of the real estate industry, part of the answer is this: “I just don’t want to have to answer to Wall Street analysts daily, weekly, monthly and quarterly.”

Lincoln, with a $3-billion portfolio that includes about $600 million worth of property in Southern California, has plenty of company among those in his business who don’t want to dance to Wall Street’s tune.

Executives at some of the largest remaining privately owned real estate investment and development companies in the region say they have good reasons for remaining private even though a popular view of publicly held REITs is that they are the best thing to happen to real estate since the second trust deed.

Yet some of the biggest owners of Southern California commercial real estate remain private. They include Industry-based Majestic Realty Co., the largest commercial property owner in Los Angeles County, as well as Irvine Co., Watson Land Co., and a number of other household names in the real estate development and investment arena.

The privately held firms say they frequently get calls from REITs wanting to acquire their portfolios and investment bankers wanting to take them public.

But they resist the REIT revolution despite the conventional wisdom that converting to a REIT structure enables such firms to raise capital quickly and cheaply, that being publicly traded provides immensely desirable liquidity, and that the popularity of REITs on Wall Street almost assures their stock would trade at a premium.

Their reasons for preferring privacy range from the hard facts of the bottom line to intangibles like flexibility and control. Among those most commonly cited:

* Remaining private allows executives to concentrate on the business rather than spending time justifying their actions to analysts.

* Savvy private investors with good track records can raise money just as easily and as cheaply as REITs.

* They can return as much profit or more to investors.

* They have the flexibility to venture into more and different types of investments and development deals than REITs.

* The proliferation of publicly held REITs provides a willing pool of well-heeled buyers when privately held firms want to sell some of their holdings.

* Being on your own is more fun than having stockholders and analysts looking over your shoulder.

None of these executives suggests that being a REIT would be the worst of all possible fates. They just don’t see any reason a company would convert to the public REIT structure if it didn’t have to.

Brentwood-based Douglas Emmett & Co., which owns about 7 million square feet of commercial space, said the company analyzed the advantages and disadvantages of becoming a REIT but saw no reason to go public, said principal Jordan Kaplan.

“What it really boils down to is REITs are a way for people to raise money or dispose of property,” Kaplan said. “We’re comfortable with the way we’re raising money. We raise money basically as easily as a REIT does, and we’re not subject to the vagaries of the stock market.” Emmett isn’t looking to dispose of any properties, he said, so that eliminates reason No. 2.

Others interviewed for this article repeated Kaplan’s assertion about the ease of raising capital in today’s economy, downplaying that as an incentive to become a REIT.

“Basically, money is cheap right now,” said Randy Banchik, a vice president at Brentwood-based Westwood Financial Corp., which owns 3.5 million square feet of commercial space, most of it in Southern California, in partnerships with about 150 investors.

According to Ray Watson, vice chairman of Irvine Co., the two primary reasons that companies take the REIT route are to raise capital to pay off debt or to raise capital for acquisitions.

“We have more than adequate sources of capital and we have a relatively low level of debt, so there’s really no reason to go into the public market,” Watson said.

Irvine Co. did convert its apartment holdings into a REIT in 1993, Watson noted, but he said that was because the company wanted to develop apartment buildings faster than it could have through private capital sources available at the time.

“After we formed Irvine Apartment Communities, there were suggestions that we should form a REIT for our commercial and industrial properties, but we have said publicly that we don’t have any plans to do that. Right now there is no reason to take that step,” Watson said.

The question of who pays more for capital--REITs or private firms--is the subject of much argument, according to Lincoln’s Butcher. Depending on what set of assumptions you use in calculating the cost of capital, he said, REITs pay either slightly less or slightly more than private borrowers.

But no two deals are exactly alike, so there is no hard rule about who pays more for capital on any given day, Butcher said. On balance, both REITs and private firms can raise money at about the same interest rates and ultimately pay about the same when all costs are considered.

Many of those who choose to remain private have built large portfolios quietly over the years and prefer to keep operating the way they always have.

“We like what we’re doing and the way we’re doing it. We’ve been successful at it for 27 years, and we still believe this is the best way for us to make money for our investors right now,” said Banchik of Westwood Financial. “We get calls from investment bankers all the time and we tell them we’re always willing to look at opportunities, but there’s nothing yet that has persuaded us to go down the REIT path.”

Westwood doesn’t compete against REITs because it is acquiring supermarket- and drugstore-anchored shopping centers that “fall beneath the radar screen” of REITs.

“We like to do things quietly and on our own, without having to worry about what the analysts want us to do,” he said. “We have about 150 active investors, and any of them can call us at any time and talk about their investments. We’re just an entrepreneurial company that prefers to remain that way.”

Kaplan, the Douglas Emmett principal, said the entrepreneurial edge can be significant for privately held real estate investment firms, especially those like Emmett that take a contrarian approach to investing.

“In real estate, where you really make money is when you are able to move against the herd,” said Kaplan, whose company and its partnerships bought many office buildings at bargain prices when such properties were out of favor with the market. While private companies lack the liquidity of REITs, Kaplan added, that liquidity comes at a high price.

“There is a lot of intrinsic value in controlling a piece of property,” he said. “That control is what you give up in exchange for liquidity.”

That control, also, is often what keeps private investors and developers interested in the business. Successful commercial real estate developers have a rich tradition of independence and what Watson of Irvine Co. describes as “a very possessive attitude” toward their properties.

That means there is much more to the business than the bottom line, according to Butcher.

“I’m in business to have fun,” he said. And he doesn’t see any fun in going public.