Monday, August 07, 2006

DEI Douglas Emmett and the billion dollars. A REIT story.

The IPO of Douglas Emmett (DEI) will be the largest equity REIT IPO of 2006. DEI specializes in owning Class A office properties in downtown Los Angles, California and Honolulu, Hawaii. In DEI's own words:

We are one of the largest owners and operators of high-quality office and multifamily properties in Los Angeles County, California and have a growing presence in Honolulu, Hawaii. Our presence in Los Angeles and Honolulu is the result of a consistent and focused strategy of identifying submarkets that are supply constrained, have high barriers to entry and exhibit strong economic characteristics such as population and job growth and a diverse economic base. In our office portfolio, we focus primarily on owning and acquiring a substantial share of top-tier office properties within these submarkets and which are located near high-end executive housing and key lifestyle amenities. In our multifamily portfolio, we focus primarily on owning and acquiring select properties at premier locations within these same submarkets. We believe our strategy generally allows us to achieve higher than market-average rents and occupancy levels, while also creating operating efficiencies.

Douglas Emmett owns about 21.5% of the Class-A office space in its Los Angeles submarkets and 13.2% of the office space in the Honolulu central business district [CBD]. Because of the limited supply of desirable properties in such desirable locations; Douglas Emmett can charge above market rents while still keeping high occupancy. This is important

Given the recent strong market interest office REITs, this IPO should do very well. Office REITs, with exclusive desirable properties, such as Manhattan based SL Green (SLG), have been trading at a premium to the equity REIT sector which is itself trading at all time high valuations. DEI is the west coast SL Green (SLG). Investors in SL Green have done very well for themselves. The stock market assigns a very real premium to REITs owning top-notch CBD office properties.

Douglas Emmett Inc (DEI) is being structured as an UPREIT. The publicly traded REIT itself will own the General Partner interest, and a portion of the limited partner interests of Douglas Emmett Properties LP, which is the underlying operating partnership that owns the properties.

Blazac noted that behind every great fortune there is a crime. To modernize Balzac's observation, replace fortune with "capital structure".

Because DEI is not currently a living REIT, all sorts of formation transactions, financing transactions, and pre-REITification clean up must happen before the IPO. These greatly complicate the prospectus. IPO proceeds will be used to pay a combined cash and equity consideration for the assets (properties) of various historical operating companies and to integrate them into the operating partnership.

Most of the numbers haven't been worked out yet, but they all assume an IPO of at least $1 Billion. Expect further developments as DEI gets closer to its IPO.


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