In a deal that again raises the question of whether Wall Street undervalues some publicly traded REITs, Arden Realty of Los Angeles has joined the growing number of publicly owned real estate companies to be bought out by institutional investors. Made up of two separate transactions, the total deal is worth $4.8 billion.
GE Real Estate is acquiring most of Arden's assets for $3.2 billion, or $45.25 per share. In a separate but related deal, Trizec Properties plans to acquire 13 of the choicest office buildings in the Arden portfolio, including some in the coveted West Los Angeles and San Diego markets. The $1.6 billion price tag paid by Trizec for those select assets would effectively erase all of Arden's outstanding debt.
Arden is the largest office REIT on the West Coast, with 18.5 million sq. ft. in 192 buildings, all in Southern California.
The Arden sale follows a now-familiar pattern: The buyer is an institutional investor that plans to pay cash. When rumors of a pending sale came to light last summer, Arden's stock price rose from the mid-$30s per share to the mid-$40s. Citing SEC rules, Arden and GE Real Estate officials declined to comment on the deal until it closes late this month or in early April.
Investors paid the full value of Arden's underlying real estate, rather than attempt to scoop up the stock at a deep discount and possibly trigger a fight with investors. GE Real Estate may have paid a 5% premium on the real estate, as a nod to Arden's well-regarded management team that will remain in place, says analyst Jim Sullivan of Green Street Advisors.
The Arden deal again opens the question of why some REITs are consistently undervalued in the public markets. “There is still a disconnect between the way that private institutional investors value real estate and what Wall Street is willing to pay for public real estate securities,” says David AuBuchon, an analyst with A.G. Edwards & Sons.
One possible reason for the disparate view is differing perceptions of the Southern California office market, says AuBuchon. The equities market is seeking robust returns in the short term, and the lukewarm office market in Southern California may not have excited growth-stock investors who like to see dramatic movement on a quarterly basis.
So what do private investors see in Southern California that Wall Street is missing? Perhaps it's the benefit of a longer-term hold. AuBuchon says the Southern California economy is diverse, with entertainment and business services driving Los Angeles, technology and financial services propelling Orange County and bio-tech leading San Diego.
With fundamentals improving — the vacancy rate in downtown Los Angeles dipped to 14.6% in the fourth quarter of 2005, down 2.1% year over year — the real difference between Wall Street and private institutions may simply be a matter of patience, according to AuBuchon. “As an asset class, real estate has traditionally provided stable, long-term returns,” he points out, predicting the new owners will hold the portfolio from five to 15 years.
If his optimism holds true, Wall Street may someday change its view.