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Shares of office firm soar after IPO

Douglas Emmett's stock jumps 12.6% on the appeal of its Westside commercial holdings.

October 25, 2006|Roger Vincent | Times Staff Writer

Investors drove up shares of Douglas Emmett Inc. in its first day of trading Tuesday, underscoring the desirability of Southern California commercial real estate and the company's strong position in that market, analysts said.

The Santa Monica-based office landlord, which owns several trophy office buildings in the Southland, saw its stock jump 12.6% a day after it raised $1.39 billion in the largest initial public offering ever for a U.S. real estate investment trust.

Investors apparently placed high value on Douglas Emmett's concentration of holdings on the Westside, where rents are rising rapidly and the barriers to erecting competing buildings are high.

"The public markets are starting to appreciate the differences between better office submarkets and others," said Bill Kamer, Douglas Emmett's chief financial officer.

The company also is appealing because it is one of few real estate companies offering investors the chance to bet on the region's office market, after a handful of major mergers took other companies out of reach.

Large investors have been drawn to office properties in recent years as the improving economy fills buildings with tenants paying higher rents, while growing construction and land costs limit competing developments. Southern California is among the nation's top commercial real estate investment markets.

Douglas Emmett stock closed at $23.65 on Tuesday, with 22.3 million shares changing hands. In its initial public offering Monday, investors snapped up 66 million shares at $21 apiece -- the top of the $19-to-$21 range the company sought when it stated its intention to go public in June. Demand was 20% higher than the 55 million shares.

Analysts expect underwriters to release almost 10 million more shares, potentially pushing the value of the offering to $1.6 billion. The top eight executives are about $860 million richer on paper, with founder Dan A. Emmett expected to own more than $381 million worth of stock, according to company documents filed with the Securities and Exchange Commission.

Douglas Emmett owns 46 high- and mid-rise office buildings, totaling 11.6 million square feet. Its trophy office buildings include a 21-story tower on a bluff overlooking the ocean in Santa Monica. The company also owns Studio Plaza in Burbank's Media District and the Sherman Oaks Galleria office and retail complex.

It also has nine apartment complexes with a total of 2,868 units, including some in Hawaii.

Much of the portfolio includes less flashy properties on the Westside filled with small professional or entrepreneurial firms whose executives live nearby.

"They're in the nicest neighborhoods," said Bobby Turner, managing partner of Canyon Capital Advisors, a Beverly Hills-based real estate investment firm. "They've been smart, patient, methodical investors and their portfolio is almost unrivaled."

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 Emmett, Chris Anderson, Jordan Kaplan and Kenneth M. Panzer concentrated on buying up what they considered to be undervalued office buildings.

They went on to build their portfolio by investing funds on behalf of large institutional investors, such as university endowments.

Douglas Emmett's success is based in part on humility, Turner said. "They've kept their business quiet and close to the vest, and it's given them a strategic advantage."

Indeed, one challenge Douglas Emmett faces by going public, tapping investor interest in a peak investment climate, is an abrupt change in its corporate culture. For years, the company moved at its own pace, shunning the spotlight and declining to reveal details about its finances.

"Real estate is not a quarterly business, but Wall Street focuses on quarterly performance," said analyst Craig Silvers of Bricks & Mortar Capital. "You have a lot of people staring down at what you do, and a lot of companies don't make the transition to being public well."

The company expects the bulk of its future growth to come through raising rents. CFO Kamer estimates that rents will go up an average of 7% annually for the next four years in the markets where the company has property.

Douglas Emmett's IPO comes shortly after the acquisitions of other real estate investment trusts with significant Southland office holdings. REITs allow investors to join in large real estate ventures. Unlike other public companies, they must distribute 95% of their income to shareholders.

Los Angeles-based Arden Realty Inc., once the region's largest office REIT, cashed out this year in a $3.2-billion sale to General Electric Co. GE quickly sold some of the best Arden buildings to Chicago-based Trizec Properties Inc., which in turn was sold to investment firms Brookfield Properties Corp. and Blackstone Group.

Maguire Properties Inc., another REIT and the largest office landlord in downtown Los Angeles, is also reported to be in merger talks and may be sold before the end of the year.

"Their timing was impeccable," analyst Michael Knott of Green Street Advisors said of Douglas Emmett's IPO.

"This signals that REIT investors are very enthusiastic about prospects for internal growth of the company, and the disciplined investment strategy that allowed them to build this concentrated high-quality portfolio."

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