Blockbuster films “The Hunger Games” and “Divergent” have topped box offices around the world, and they’ve helped make the films’ producer, Lions Gate Entertainment Corp., L.A.’s most profitable public company.
But while the Santa Monica studio delivered a marquee performance, earning a 54 percent return on equity over the past three years – the metric the Business Journal uses to calculate profitability – it was L.A.’s real estate industry that stole the show. The white-hot multifamily and commercial markets helped land a handful of related companies near the top of the Business Journal’s annual ranking. (See page 18.)
Homebuilders KB Home in Westwood and Ryland Group Inc. in Westlake Village – the latter of which agreed to merge with Irvine’s Standard Pacific Corp. last month – placed No. 6 and No. 7, respectively, both with a three-year return on equity of 27 percent. Downtown L.A.’s CBRE Group Inc., the world’s largest commercial real estate firm, ranked 11th on the list of most profitable public companies, with a three-year return on equity of 22 percent. Calabasas commercial brokerage Marcus & Millichap Inc. finished right behind, delivering a 21 percent return.
Not surprisingly, they did even better when looking at just the last 12 months. CBRE delivered a 23 percent return on equity over the past year and Marcus & Millichap a healthy 55 percent.
Richard Jones, a private wealth adviser at Merrill Lynch Wealth Management in Century City, said robust interest from overseas investors – particularly from China – has been one of the biggest boons to commercial and multifamily real estate in Los Angeles.
While many casual observers associate Chinese real estate investment in Los Angeles with McMansions in Arcadia or Beverly Hills, there’s a tremendous amount of investment in income properties, from apartments and condos to office buildings. When there’s a lot of interest in buying such properties – and subsequently leasing the space to tenants – brokerages such as CBRE and Marcus & Millichap tend to do well.
In addition, Jones said macroeconomic trends should continue to work in favor of those firms, as downtown L.A.’s office market remains a draw for tenants and the increasing unaffordability of single-family homes has turned would-be buyers into renters.
“You’re seeing younger people opting to rent instead of buy and a strong demand for multifamily rentals,” he said. “Also, a lot of aging baby boomers are deciding to downsize.”
Brandon Dobell, who covers CBRE and Marcus & Millichap for Chicago investment bank William Blair & Co., agrees that it’s a good time to be in the brokerage business.
“Right now, commercial real estate is attracting a lot of institutional capital – and you’re going to need intermediaries,” he said. “Both companies benefit from buildings trading.”
CBRE in particular is also getting a boost from large companies increasingly outsourcing management of their real estate.
“There’s a very big secular trend for owners and occupiers to outsource any noncore functions,” Dobell said. “CBRE now is the biggest property and facilities manager in the world and will get bigger.”
But it’s not only real estate-related companies that are bringing in soaring profits lately. Lions Gate, of course, topped the list, and Burbank’s Walt Disney Co. placed No. 21 – that’s no small feat, given that the most-profitable list looks at return on equity and that Disney, with a market cap of more than $200 billion, is by far the most valuable company in Los Angeles.
Lions Gate’s leap to the No. 1 spot – it ranked fifth last year – is even more impressive given the companies it beat, Sherman Oaks apparel licensing firm Cherokee Inc. and Glendale restaurant franchisor DineEquity Inc., both of which have the kind of high-margin, low-overhead business models that make them perennial contenders for the top spot.
Jones said Lions Gate and Disney benefited from blockbuster movies such as the “Hunger Games” trilogy and “Frozen” still resonating and bringing in big money in an increasingly fragmented media delivery world,.
“Content is king now,” Jones said. “And they have really good content.”
Another venerable L.A. company, El Segundo toymaker Mattel Inc., won by losing, in a way.
The Business Journal calculates profitability using a standard return on equity measure of dividing a company’s net income by its average equity. So while Mattel’s stock is down 34 percent over the past 12 months, that actually helped it remain near the top of the most-profitable list despite seeing its earnings fall 45 percent last year compared with the year before.
The firm’s cratering share price reduced its equity, offsetting the impact of the big earnings drop.
While movie studios and real estate brokers enjoyed a very profitable run in recent years, that hasn’t been the case for L.A.’s financial institutions. A combination of rock-bottom interest rates and escalating compliance costs have squeezed the profitability of many local banks – and has even been a factor in causing some to seek acquisitions.
For example, Covina thrift Simplicity Bancorp was acquired in March by Seattle’s HomeStreet Inc. in a deal Simplicity’s then-chief executive said was mainly influenced by the regulatory burden facing his bank.
The Business Journal’s list of most profitable companies is relatively bereft of banks. Koreatown’s Wilshire Bancorp Inc. and Hanmi Financial Corp. were the only two in the top 20, and downtown L.A.’s City National Corp., at No. 42, was the highest-ranking bank that doesn’t primarily cater to the Korean- or Chinese-American communities.
Jones said that despite a general economic recovery, banks and other finance firms are seeing that it’s hard to be profitable while interest rates remain near zero.
“Even financial firms that are gathering a lot of new assets, with record asset management fees, are finding that it’s still tough to make money,” he said.
But as rates eventually ease, Jones expects the local finance industry to rebound – maybe in time for next year’s list.
“I do think there’s going to be some pressure over the next year on interest rates, and an increase in interest rates should help the financial sector,” he said. “That’s certainly something to look out for.”
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