REIT IPOs Get Equity, Lose Freedom


Developer John Kilroy Jr. remembers when the details of his office and industrial developments were as private as his bank balance, he could ignore the press and he didn't have to justify his every purchase to stock analysts.

"Why give [your strategy] away," he said. "We just didn't talk to people."

A large part of his freedom and privacy were lost when he and his father took their 50-year-old real estate firm public in January 1997 to escape a mountain of debt. Instead of calling their own shots, they now had to toe Wall Street's line.

Other regional developers who jumped on the REIT bandwagon made the same discovery--the rules they had played by for decades no longer applied in the new world of publicly held real estate. There was a price to be paid for gaining access to Wall Street's deep pockets, and it would change the way they had done business for decades.

No more shooting from the hip or making extravagant projections about how profitable a development would be. No more spending binges after a seven-figure check arrived from a tenant.

"I had to be a lot better behaved," said fellow developer Warren "Ned" Spieker, chief executive of Menlo Park-based Spieker Properties Inc.

But in exchange for selling stock and toning down their brash personal styles, many developers and investors were able to turn their regional firms into national powerhouses. Crushing levels of debt were erased overnight, portfolios doubled and tripled within a year or two.

Los Angeles-based Arden Realty Inc., which typically bought office industrial buildings one at a time, spent a whopping $614.5 million in cash and stock last March to buy about 50 office and industrial buildings held by Newport Beach-based Layton-Belling & Associates. Instantly, its holdings surged by one-third, making the company one of the largest owners of commercial real estate in Southern California.

Los Angeles-based Kilroy Realty Corp., in its first 20 months as a public company, added 7.6 million square feet to its portfolio of aerospace and high-tech buildings, tripling its portfolio. By purchasing another developer, San Diego-based Allen Group, it gained enough land for almost 4.8 million square feet of new development.

"While we were considered to be a fairly large developer by private standards, it was nowhere comparable to the powerhouses that REITs have become today," Kilroy said. "We knew we were going to have to be bigger and public or get smaller."

In 1997, when Kilroy went public, the appetite for real estate investment trusts was strong and initial public offerings were sprouting as quickly as office parks. People across the country, many of whom had never invested in commercial real estate deals before, were snapping up REIT shares. Kilroy raised $287.5 million in its first outing--the most of any California IPO that year.

But adjusting to Wall Street's rules and expectations was not easy for most developers. Accustomed to being their own bosses, they now had to match performance standards set by young Ivy League-educated analysts who often knew little about real estate. And the public was able to voice its opinion by buying and selling the company's stock at will. Although most analysts are now more familiar with the fundamentals of real estate, REIT executives still face the problem of holding onto fickle shareholders.

"While many developers had outside investors, they were locked up for a period of time," said Fred Roberts of investment banking firm F.M. Roberts. "Now they had to focus on two businesses: their business and the stock market business," Roberts said.

Instead of signing leases and fretting about the cost of utilities, executives like Kilroy and Richard Ziman of Arden Realty now spend a large part of their time meeting with institutional investors, taking conference calls, and attending REIT conferences, investment banking seminars and other industry events.

"I have to keep existing and potential investors informed about who we are and what we are about," Ziman said. "I used to get on a plane 25 times a year. Now I average 75 personal and professional flights a year."

For Spieker, a higher public profile has had other day-to-day repercussions: People on the street have recognized him and questioned him about the company's plans. And he made some early gaffes, such as leaking rent prospects to an investor who buttonholed him during a roadshow. But now he says he's learned to tell it like it is, not how he wishes it were.

"As a developer, you're used to promoting, to selling, but in the public market, that's anathema," Spieker said.

Kilroy says he also has had to learn to look at his business as more of a commodity. When Wall Street investors and analysts took a strong liking to the three office developments that bear his family name, his marketing department began putting the Kilroy moniker on all its new developments. "You're endeavoring to be a name brand." Kilroy said.

Kilroy seems to get it, but analysts say a lot of others don't understand the subtleties of the market.

"Most real estate developers are entrepreneurs and rugged individualists. I think they are less prepared emotionally for the public market than the CEO of an industrial company," Roberts said.

These days, REITs are trying to do whatever it takes to please investors and analysts. And with good reason. Share prices have plunged 22.85% in 1998, according to the Bloomberg REIT index.

The fall from grace has left many investors and developers unaccustomed to the fickleness of Wall Street scratching their heads, said Los Angeles real estate attorney Leo Pircher.

Most have seen the huge net worth they accumulated in initial offerings plunge along with share prices. And the bearish market has hampered their attempts to get capital. But despite the downturn, most say they plan to hold on to their public status.

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