Some Firms Turning Away from Wall St.
For some real estate firms, Wall Street has turned into a dead end.
Disappointed with their stock’s performance, the top managers and key investors of Los Angeles-based CB Richard Ellis Services Inc. this month unveiled a $340-million buyout offer that would take the huge real estate firm private only four years after it joined the New York Stock Exchange.
In a more drastic move, the shareholders of Newport Beach-based Pacific Gulf Properties Inc. approved a management proposal this month to liquidate the publicly owned company instead of continuing to watch their stock languish.
After hordes of real estate companies joined the rush to Wall Street in the 1990s, a small but growing group has decided that public ownership has not paid off. While most companies remain wedded to Wall Street, more real estate companies are expected to abandon the public equity markets as concerns about a slowing economy and other factors keep a lid on real estate stocks and limit the firms’ ability to raise capital, industry analysts say.
“If the current valuations continue, more of this activity will occur,” said Jay P. Leupp, a real estate securities analyst for the firm Robertson Stephens in San Francisco. “These companies are wonderful earnings producers as private companies.”
The number of Wall Street dropouts remains relatively small compared with the hundreds of firms that transformed themselves into real estate investment trusts or other forms of publicly traded companies during the 1990s, according to industry estimates. So far this year, more than a dozen real estate investment trusts alone have been merged into privately owned groups or have liquidated, according to the National Assn. of Real Estate Investment Trusts. That leaves 192 publicly traded REITs.
But the defections will continue to chip away at the ranks of public real estate companies, which have rapidly discovered the drawbacks of public ownership. Investors often have difficulty figuring out what to expect from real estate stocks because many public companies have a relatively short track record on which to judge future performance.
In addition, many real estate stocks remain small and thinly traded, meaning big institutional investors pass them up because they are considered riskier than more widely owned stocks. Even CB Richard Ellis, which ranks as the largest real estate brokerage and services firm, has a market capitalization of less than $1 billion.
Investors--who flocked to REITs during a period of rapid real estate appreciation in the mid-1990s--have become more discriminating, securities analysts say. That’s made it even harder for marginal players.
Los Angeles developer Rob Maguire said investors now pay a premium for the firms that have the skill to successfully develop properties in established markets where there is limited new construction.
“There is starting to be some real differentiating between stocks,” said Maguire, whose firm remains privately owned. “There is a realization that the [firms] that just depend on acquisition have run out of ammo.”
It’s clear that some real estate executives have done a better job than others at wooing Wall Street by creating large companies, producing consistent results and communicating well with the investment community.
“They listen to Wall Street. They listen to shareholders,” said real estate analyst Craig Silvers at Sutro & Co. in Los Angeles. “They didn’t burn anyone, and they have done well.”
Real estate executives who remain loyal to Wall Street said selling shares to the public allowed them to grow much faster and at less cost than relying on pension funds and other traditional sources of real estate capital. The ability to award stock options also has proved an important tool to attract and retain top executives.
Los Angeles-based Arden Realty Inc., which went public about the same time as CB Richard Ellis, grew from 4 million square feet of office space to nearly 20 million. The company has no plans to abandon Wall Street.
“Without having the opportunity of being a public company, we could never have achieved the size, the depth and the strength the company has today,” Chairman Richard S. Ziman said. “It would have been much more expensive through pension and opportunity funds.”
But Ziman conceded that going public is not for everyone. Wall Street’s obsession with quarterly and predictable results is often at odds with the long-term, entrepreneurial nature of the real estate business, he said.
In addition, the results of firms like CB Richard Ellis might be too volatile for investors and securities analysts to predict or accept, Ziman said.
“The analysts and portfolio manager couldn’t get their arms around them,” he said. “Going private is probably a better move on their part.”
Officials at CB Richard Ellis declined to comment. The board of directors has formed a special committee to review the buyout offer, which includes San Francisco financier Richard Blum. A company official would not comment on when a decision would be made.
At the end of 1996, the shares of CB Richard Ellis and other real estate service companies soared as real estate markets staged a dramatic recovery. But now, with most real estate markets slowing down, the shares of these firms have taken a beating as investors believe the pace of leasing and sales transactions--the main source of revenue for service companies--has peaked. If anything, Leupp said, shareholders will be tougher on service firms than on shares of other real estate firms because they are not secured by property.
The pool of publicly traded real estate companies is destined to get smaller as more firms go private or disappear through mergers or consolidation, industry observers say. Wall Street’s lackluster response to real estate shares gives private companies little incentive to enter the public arena.
“I don’t think you will see much in the way of new public offerings,” said Silvers of Sutro & Co. “Not even the established firms are doing these deals. They will go private or be acquired by another [firm].”
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REIT Stocks Still Lag
Despite a surge this year, real estate investment trust shares in general remain far below their peaks reached in 1997 and 1998.
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Monthly closes and latest for Bloomberg index of 136 major REIT stocks
Monday: 113.56
Source: Bloomberg News
