Even as buyout firms dangle billion-dollar offers before listed office REITs, the public markets continue to shower public office trusts in capital.
Tuesday brought added proof of mutual attraction when Southern California office landlord Douglas Emmett (DEI) made its debut in REIT-land with a $1.39 billion IPO. Aside from becoming the second office REIT to go public in 2006, Douglas Emmett also stands as the largest REIT IPO in U.S. history (the next largest offering was Boston Properties’ $902 million IPO back in 1997).
DEI brings a stellar core portfolio into the public sphere. The company owns 55 office and multifamily properties scattered across nine Los Angeles submarkets. The total portfolio consists of nearly 12 million sq. ft. of office space and 2,868 apartment units. It’s hard (perhaps impossible) to find any listed office company with such a strong core portfolio in what many consider the nation’s most vibrant commercial real estate market.
Investors flocked to DEI shares, driving share prices up 13% on the first day of trading. Shares were so hot that DEI upped the stock offering to 66 million shares from 55 million.“There’s a tremendous amount of private capital out there looking for deals,” says Keven Lindemann, director of the real estate group at Charlottesville, Va.-based SNL Financial. “But the [REIT] shares have risen so much in recent months that the arbitrage opportunities aren’t there.”
Indeed, office REITs are up 40.65% on a total return basis over the past 52 weeks. So does the DEI offering signal that more office companies will adopt REIT status? Lindemann isn’t so sure. For one thing, buyout firms still have seemingly unlimited buying power (it can’t hurt that the FOMC kept the federal funds rate unchanged at 5.25% yesterday, too). Plus, many of these closely-held firms often team up on so-called “club deals,” joint ventures which give them even more debt-drenched dollars to play with.
“It does become more attractive to be a public office REIT when many of your competitors are leaving the stage,” Linemann says.
SNL data finds that 20 office companies have become listed REITs over the past 11 years. Merger and privatization activity has culled five companies from that list, most of them within the past two years, and some office players appear ripe for privatization. Another Los Angeles office REIT, Maguire Properties (MPG), was expected to go private earlier this year.
Rumors have also circulated in recent months that either Boston Properties (BXP) or Equity Office Properties (EOP) were mulling over privatization. To Lindemann’s point, however, shares in both EOP and BXP have risen by more than 25% over the past 52 weeks. This casts doubt on any buyer who believes they can fetch either company at a discount or even slight premium to the share price.
Private financial players are still piling up funds for large real estate deals. On Monday, for example, investment bank Perella Weinberg Partners announced plans to launch its own real estate investment fund. REITs could be on their wish list, too.
One commercial real estate economist believes that most office owners aren’t grappling with the decision between staying public and going private for a simple reason: They don’t have to.
“I don’t think they can go wrong either way,” says Kenneth McCarthy, managing director of market research at Manhattan-based Cushman & Wakefield.
“Both the public and the private markets can’t seem to get enough of these companies. That’s a very healthy position for these office companies regardless of what they decide to do.”