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	1,900 employees 45 offices, 28 countries $59 billion in assets $78 billion served assets

 

Arden’s Game Plan

Former REIT drafts new playbook

With more than $5 billion in deals closed over the past 15 months, Arden Realty Inc. has become one of the most active buyers and sellers of commercial real estate in the U.S., which is a big change for the Los Angeles-based company.

Since Arden’s acquisition by GE Real Estate in May 2006, the company has transitioned from a yield-driven REIT that made few acquisitions into a voracious buyer of value-added real estate. During the five years leading up to its acquisition by GE, Arden purchased about $600 million worth of property and sold approximately $520 million, becoming Southern California’s largest office landlord.

Today, Arden has a capital recycling program that is reshaping its portfolio to include growth-oriented real estate that complements its existing core properties. Currently, Arden owns and operates approximately 16.3 million square feet of office space across the Western U.S. and has an additional 4 million under management.

"Arden had a tremendous track record, and we decided to leverage its successful foundation by changing the business model to be more tailored toward growth," says Arden President & CEO Joaquin de Monet. "We’re reinventing ourselves from a strategy perspective. We’ve gone from the former REIT mentality to building a business based on transactions that create value and opportunity as we actively recycle capital and expand into new markets."

Recycling capital
At the time of GE's acquisition, Arden was the West Coast's largest office REIT with 18.5 million square feet in 192 buildings. All of the company's assets were based in Southern California, making it the largest office
landlord in the region.

As a REIT, Arden was focused on growing its earnings internally and had a relatively modest plan of new acquisitions following a buying spree in the late-1990s. But, under the leadership of de Monet and his senior management team, the company has strategically sold maturing, non-core assets in the portfolio and reinvested that capital both to significantly grow its West Coast platform and to enhance its portfolio with assets that provide substantial upside.

In May, as an example, Arden announced the sale of 33 of its non-core assets for $1.5 billion to Cabi Developers, a subsidiary of GICSA, a Mexico-based, international development firm. Arden retained management of the properties and also serves in an advisory capacity for Cabi.

"We’ve been able to sell in Southern California and expand into other regions," de Monet says. "We're taking properties that are less strategic and using that capital to reinvest in properties where we can leverage our expertise to create value."

In August 2007, Arden closed one of the region’s largest acquisitions – the purchase of 98 office buildings totaling 5.4 million square feet in San Diego, Orange County, San Francisco, Seattle, Portland and Salt Lake City for approximately $1.8 billion. The properties, purchased from The Blackstone Group, were previously part of the CarrAmerica West Coast portfolio, which Blackstone acquired as part of a national portfolio in 2006.

"It’s a major deal for us strategically because in a single transaction, we have established a presence in virtually all of our current target markets and accelerated our transition from being the premier operator in Southern California to the premier operator on the West Coast," de Monet says.

The Blackstone/CarrAmerica deal came on the heels of Arden’s expansion into Northern California. In september, the company acquired 26 assets in Silicon Valley in three separate transactions, purchasing two portfolios from UBS Global Asset Management and one portfolio from a partnership of Four Corners Properties LLC and Morgan Stanley Real Estate. The properties, which total nearly 1.5 million square feet, are located in Palo Alto, Sunnyvale, Santa Clara and Fremont.

And, as de Monet promised, Arden also has expanded beyond the West Coast, growing its Arizona portfolio in excess of 700,000 square feet in Phoenix and Scottsdale with a number of strategic acquisitions.

The geographic expansion is all part of Arden’s evolving game plan, de Monet says. "The Southern California market accounts for about half of the real estate on the West Coast, and if we're going to leverage Arden as a growth platform, we need to be able to double the size of the playing field. We want to maintain our foothold in Southern California, but the growth opportunity is throughout the Western U.S."

Value-added investor
Transitioning into a value-added investor, focused on the buying and selling of properties, has required tremendous flexibility from Arden employees, de Monet notes. "Our people had to move from being focused on occupancy to a different, value-add mindset," he says. "It also required building additional infrastructure and skill sets on the acquisition and disposition side."

de Monet says the new Arden blends the former REIT’s market expertise and platform with GE’s balance sheet and appetite for growth, a combination that enables the company to act quickly and occasionally pre-empt competitive bids. And, he contends the Blackstone/CarrAmerica acquisition that closed in August is further proof of the company’s bench strength and ability to take advantage of opportunities.

"We dedicated a lot of resources to get ahead of the transaction, and with the GE balance sheet behind us, we were able to differentiate ourselves from the competition,” de Monet notes. “We’re not only able to roll up our sleeves and knock out single, smaller transactions, but we can navigate large portfolio deals as well."

All this buying and selling has made a strong company even more dynamic, de Monet says, pointing out Arden’s current portfolio is better than ever. "It now consists of newer product that is well positioned in its market," he says. "The portfolio is more diverse and offers a value add component."

Going forward, de Monet estimates Arden will acquire about $1.5 billion worth of assets annually and will sell off roughly $1 billion. The company is particularly interested in purchasing class B suburban office buildings and implementing capital improvement and energy efficiency programs that enhance building NOI. And, it will continue to focus on improving operations in new markets with an expanding team.

"We’re going to continue to focus on building our infrastructure and relationships in San Francisco and in the Pacific Northwest, Seattle in particular," de Monet says. "We've launched the first strike on our strategic growth plan. But, we are just getting started and we have much more to do. Arden is evolving as we speak."

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