Douglas Emmett IPO Bucks Going-Private Trend

Considering it was one of the biggest initial public offerings of the year, Douglas Emmett's (DEI) market opening did not get a lot of press on Tuesday. But it is notable for several reasons. At about $1.39 billion, it was just the fourth IPO this year to top the billion-dollar mark. It was also the largest IPO ever for a United States-based real-estate investment trust. Known as Reits, these trusts pay out most of their annual profits to investors in exchange for favorable tax treatment.

In going public, Douglas Emmett chose the opposite path of many of its fellow Reits. Several other large Reits have been taken private in the past year or so, including CarrAmerica, which was bought by the private equity firm Blackstone Group for about $5.6 billion. There are several reasons for the trend, including the perception among some investors that the value of Reits' publicly traded shares was low compared to the value of the underlying assets, which can consist of office properties, shopping centers or other kinds of real estate.

The raising of multibillion-dollar private equity megafunds, combined with banks' willingness to loan money for Reit buyouts, has also fueled the trend.

Paradoxically, the rush to go private might have worked to Douglas Emmett's benefit. Fewer public Reits make Douglas Emmett's stock that much more valuable to investors seeking real-estate exposure. It also probably helped that many of Douglas Emmett's properties are in the red-hot Southern California market.

In its opening on Tuesday, Douglas Emmett's stock was one of the most heavily traded on the New York Stock Exchange, rising 12.6 percent from its $21-per-share offer price. Lehman Brothers, Merrill Lynch and Citigroup Global Markets were joint book-running managers on the offering.

Douglas Emmett's well-received IPO is not likely to stop other Reits from going private, though. Earlier this week, a recently launched investment bank, Perella Weinberg Partners, announced plans to raise its own real-estate investment fund, which will add to the already-large amount of private equity money prowling for Reit deals.

Buyout firms may not get the bargains they have come to expect. According to Merrill Lynch, shares of Reits are up 30 percent so far this year.