Jim Thomas has long been one of L.A.’s deans of real estate. He and partner Rob Maguire built many of downtown’s iconic skyscrapers, including US Bank Tower, Gas Company Tower and the Wells Fargo Center. After the partners went their separate ways in 1995, each set up his own real estate firm and took them public in the last couple of years. Sitting in a sixth-floor conference room with a stunning view of the Richard Riordan Central Library and the adjacent US Bank Tower, Thomas expounded on the recent real estate trends that led, in part, to Arden Realty Inc. to sell itself last month to General Electric Co. and Trizec Properties Inc. for a combined $4.8 billion. Thomas is chairman and chief executive of Thomas Properties Group Inc.
Question: You decided not to be a real estate investment trust, a popular set up for real estate companies that pays the majority of its earnings to investors in the form of dividends. Instead your company is a typically structured corporation. Why?
Answer:
We wanted to focus on growth so we went the corporation route. REITs are a yield play. Investors are after the yield the REIT stock will generate. Simply, we wanted to plow our earnings back into our business.
Q: Lately, the collection of buildings that many REITs own has been worth more than the company’s market capitalization. In that situation, does it make sense to have publicly traded real estate firms?
A:
You know, how Wall Street investors go about valuing things nobody really knows. At the end of the day, we all think our stock is undervalued. It goes up, it goes down. I would say generally, having the amount of real estate that is going into public companies has been a good thing for the real estate market in general. What it has generally done is provide a vehicle for capital to come into the real estate market in the most efficient way. No question in the long run, the most efficient capital comes by being a public company.
Q: Wasn’t that the situation with Arden the real estate was more valuable that the company and one of the reasons the company decided to sell itself?
A:
There had been rumors for several years that Arden was a candidate. We looked at Arden and decided not to bid. For us, for our business, there were six or seven properties, probably the ones Trizec is taking out of the deal, that were properties we would have wanted in our portfolio. The balance, the majority of the portfolio, we would have sold off, but we realized we couldn’t buy them at one price and sell them at another price to make it work for us.
Q: Why can GE and Trizec make the deal work at a lower margin than your company?
A:
We look for properties that we can fix and add value. Trizec is playing a different game. They are a yield play, and debt is cheap. If you can borrow at 4 percent (interest rate) and buy a property that yields 5.5 percent, well right there is a 150 basis point spread. That’s why 5.5 percent yield makes sense to Trizec but not to someone like us. We didn’t think there was enough upside.
Q: You own Arden stock. Are you happy with the outcome?
A:
I got some of that money. I owned some shares but not anything to write home about. The investors got a terrific deal. The rumor was that the investors were pushing to sell. The stock was selling around $32 and the company ended up trading for $45. I’m sure the investors are very pleased. I don’t think there’s going to be a shareholder vote but I think they will be drinking champagne.
Q: Have prices for commercial properties topped-out? Won’t the combination of higher interest rates and lower yields lead to a drop-off in the volume of deals?
A:
I think some people think the market has topped out and this is as good as it’s going to get for a while. Everybody has to decide for themselves. Every time you have a transaction, you have one person who thinks it’s time to sell and another who thinks it’s time to buy. That’s what makes a market.
Q: Is Thomas Properties Group in an acquisitions mode?
A:
We are in a very aggressive buying mode. We acquired 4 million square feet last year. We spent a half-billion dollars. We are focused on getting properties that need to be fixed, which gives us a margin of safety. By fixing them we increase their value.
Q: Still, even though your company is L.A.-based, you haven’t recently made any local acquisitions. Is Southern California no longer a primary market for the company?
A:
Oh, we’re still focused (here). We’re just not finding the value. We’re not finding those properties in Los Angeles so much. We’re out there bidding but we’re just not getting any of them. But trust me, we’re still very focused.
Q: Does that difficulty stem from the increased competition for L.A. properties?
A:
There’s an awful lot of capital available for real estate. And it has clearly caused the prices to elevate. There’s just tons of capital and it’s coming from everywhere. It’s in residential and shopping centers and industrial buildings. Some of the capital that you have here right now could eventually leave. But public companies will always have access to the most efficient capital, and they’re not going anywhere.
Q: Why is so much capital flooding into the L.A. market?
A:
Where in the country can you pick a spot that’s better than Southern California? It’s as good as it gets. If you want to make a bet on real estate, you can’t do better than here. We’ve got a strong and diverse economy and a great climate. You name it, it’s all here. The challenge is to keep it together. We need to address issues like traffic congestion, improving our infrastructure and those kinds of things.
