Local Landlord Files to Go Public
Commercial landlord Douglas Emmett Inc. of Santa Monica filed papers Friday to become a publicly traded company, saying it intends to sell $1.1 billion in stock in what would be a record initial public offering for a real estate investment trust.
It owns some of the region’s most prized property, including a 21-story ocean view office building in Santa Monica, Studio Plaza in Burbank’s Media District and apartments in Hawaii.
Analysts noted that real estate investments have been performing strongly. A Bloomberg News index of 151 real estate investment trusts is up nearly 7% this year, while the Standard & Poor’s 500 index of blue-chip stocks is up less than 1%.
Among large REITs, Maguire Properties of Los Angeles is up 13.4% this year and Boston Properties is up 19.6%, including dividends for both.
“Real estate is outpacing all other investment vehicles, short- and long-term,” said Bruce Mosler, president of real estate brokerage Cushman & Wakefield.
Whether Douglas Emmett can deliver those outsized returns to investors remains to be seen. Its concentration of commercial and residential property in Los Angeles County and Honolulu is a potential risk to investors in the event either area is hit by an economic downturn or natural catastrophe, the company said in a regulatory filing with the Securities and Exchange Commission.
In its filing, the company estimated that it would have $2.75 billion in debt, which it said could affect its ability to pay dividends -- a major reason for investing in REITs, which must pay out 95% of their earnings to investors.
Even so, the appetite for its shares should be strong, said analyst Craig Silvers of Bricks & Mortar Capital. “There is an overwhelming amount of interest in the office sector and apartments are also hot right now.”
Douglass Emmett executives declined to comment. After filing for the public offering, the company is in a “quiet period” that limits its ability to make public statements.
In its filing, the company said it expected to sell $1.1 billion in stock, which would top a record $910-million IPO set a year ago by KKR Financial Corp., the real estate investment unit of buyout firm Kohlberg, Kravis, Roberts & Co., according to the National Assn. of Real Estate Investment Trusts.
Douglas Emmett did not say what it expected shares to sell for. It valued its assets at more than $5.4 billion, listing 46 office properties totaling 11.6 million square feet and nine apartment complexes with 2,868 units.
The offices are 92% leased and more than 99% of the apartments are rented.
Douglas Emmett estimated that its funds from operations, a key measure of profitability for real estate investment trusts, at nearly $124 million last year and $46 million in the first quarter ended March 30. It did not provide comparisons with the year-earlier periods.
Douglas Emmett’s owners include several complex partnerships that would sell to the company the assets they hold. The filing warned that the price it would pay to acquire those assets might exceed their aggregate fair market value.
The company plans to go public at a time when other prominent REITs have decided to head in the opposite direction and go private.
Trizec Properties Inc. agreed this month to be sold to New York investors amid complaints by its chief executive that the company’s stock was undervalued.
Trizec had recently completed an acquisition of Brentwood-based Arden Realty Inc., another former owner of prime Westside office properties.
“Private capital values [commercial real estate] more dearly than Wall Street does,” said REIT analyst Jim Sullivan of Green Street Advisors. Douglas Emmett is “clearly bucking the trend, but it might be the right thing for them to do.”
Sullivan noted that Los Angeles is among the top three most desirable markets in the country for real estate investors, and those who can no longer hold Arden shares may be drawn to Douglas Emmett.
The bulk of Douglas Emmett’s properties are on the Westside and in the San Fernando Valley, markets where there is high demand.
In addition, Emmett’s properties in these areas are not expected to get much competition from new buildings because of various hurdles to new development, including residents’ concerns about traffic and congestion.
“Institutional capital continues to have a high level of interest in and demand for high-quality property located on the West Coast,” said Wayne M. Brandt, managing director of real estate finance at RBS Greenwich Capital. “The supply-and-demand equation seems to be relatively balanced with not a lot of new construction occurring.
Douglas Emmett was founded in 1971 as the development and management arm of Jon Douglas Co., a real estate brokerage based in Beverly Hills.
During the real estate recession of the early 1990s, principals Dan A. Emmett, Chris Anderson, Jordan Kaplan and Kenneth M. Panzer concentrated on buying up what they considered to be undervalued office buildings and went on to build their portfolio by investing funds on behalf of large institutional investors.
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Prized assets
Douglas Emmett’s office holdings include 11.6 million square feet in Southern California and Hawaii. A sampling:
100 Wilshire: The white 21-story tower at Wilshire Boulevard and Ocean Avenue in Santa Monica commands some of the highest rents in Los Angeles County.
Sherman Oaks Galleria: Douglas Emmett remade the landmark indoor mall, which had shut down in 1998 amid flagging sales, into a successful open-air shopping center and office complex.
Studio Plaza: The 455,000-square-foot office building in Burbank’s Media District is mostly rented to Warner Bros.
Warner Center Towers: The five blue-toned skyscrapers holding 1.9 million square feet are among the most prominent buildings in the Woodland Hills business center.
10990 Wilshire: A 200,000-square-foot tower in Westwood that houses the headquarters of homebuilder KB Home and other tenants.
Source: Douglas Emmett Inc. and CoStar Group
Los Angeles Times
