Casden Converts to REIT to Boost Expansion Plans

Buoyed by a booming apartment market, Casden Properties Inc.--one of the largest private owners of apartments in the nation--has completed a private stock offering worth $390 million, which converts the company to a real estate investment trust.

The huge cash infusion will allow the Beverly Hills-based REIT, which was a prolific developer in the 1970s and 1980s, to expand rapidly in Southern California while other large, but publicly held, apartment firms struggle to find capital to grow.

Analysts say the stock offering gives Casden, which owns 121 complexes worth more than $1 billion, and an interest in 377 others, the proper structure to go public if the market for REIT shares recovers.

“There’s not a lot of pure [Southern California stock] plays out there. This is probably as close as you can get,” said Craig Silvers, an analyst with Los Angeles-based Sutro & Co.

Casden owns more apartment units than such public competitors as Irvine Apartment Communities of Newport Beach and Essex Property Trust of Palo Alto. Casden holdings include the 698-unit Century Hillcrest on Pico Boulevard, Broadcast Center on Beverly Boulevard near Fairfax Avenue and 1,279 units in Warner Center.

Most of Casden’s properties are in Los Angeles County. They were built during the development boom of the 1980s by Coast Fed Properties, the apartment REIT’s predecessor that was owned by developer Alan Casden and now-defunct Coast Savings. Casden bought out Coast’s interest in 1990. Since then he has been buying and developing through partnership syndication.

Casden plans to use the proceeds of the offering to finance a series of acquisitions and developments. Currently, the company has one 624-unit apartment project under construction on Centinela Avenue in West Los Angeles and it has agreed to purchase land for three other Westside complexes totaling 1,600 units. It also is redeveloping a government-subsidized, low-income housing project in Honolulu. Casden bought 3,000 apartment units in 1998 and is under contract to purchase 1,600 more units.

Under the terms of the deal, Casden issued 9.3 million shares of preferred stock for $218.5 million, mainly to investment funds advised by Blackacre Capital management, along with an additional 8.7 million shares of common stock. The REIT is now half-owned by investors and half by company management and directors.

The offering underlines the growing interest in Southern California apartment development. Few units have been built since the recession began in the early 1990s.

“Now that the rents are approaching or surpassing where they were in the late 1980s, it is more economically viable to develop, rather than just purchase them,” Casden said.

Brokerage expert William Millichap said last week at a forecast meeting held by the Real Estate Conference Group that he expects rental rates to rise another 7% to 9% annually in Los Angeles over the next few years.

Developers have gotten the message. In 1998, construction began on 4,187 apartment units in Los Angeles County, 12% more than the year before, while the pace of construction in Orange County slowed to 2,198 units beginning construction in 1998 from 2,579 the previous year.