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Why Douglas Emmett Is Snatching up Properties in Supply-Constrained Markets

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Dec. 15 2015, Updated 11:06 a.m. ET

Acquisitions to gain market share

Douglas Emmett (DEI) acquires properties in supply-constrained markets with high entry barriers—a practice that provides the competitive advantage to it while keeping competition at bay. The company acquires properties in submarkets mainly in order to gain a substantial market share, but it also targets properties with high-end features and amenities in order to attract large corporate tenants. Such properties are expected to generate higher occupancy and rental revenues to the company. On the other hand, Douglas Emmett disposes of properties that don’t meet its long-term earnings and cash flow growth objectives.

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Property acquisitions

Douglas Emmett has acquired a number of properties during the past five years. The company acquires properties and repositions them for optimal use and tenant mix. In 2014, Douglas Emmett acquired a class A office property of 216,000 square feet in Beverly Hills for $74.5 million—approximately $345 per square foot—and the company also acquired a multifamily property with 468 units in Honolulu for $146, which added up to $312,000 per unit.

In 2013, the company acquired a class A office property of 225,000 square feet in Beverly Hills for $89 million—approximately $395 per square foot—and the company purchased a class A multi-tenant office property sized at 191,000 square feet in Encino for $6 million, which came down to $319 per square foot.

Boosting growth

The company’s focus on property acquisitions and dispositions bodes well for healthy growth. The average rental income of the company has improved significantly over the past several years, mainly due to acquisitions of many high-quality properties.

Other major office REITs (real estate investment trusts) include Alexandria Real Estate Equities (ARE), SL Green Corporation (SLG), and Boston Properties (BXP), all of which are also active in property acquisitions and dispositions. The SPDR DJ Wilshire Global Real Estate ETF (RWO) invests approximately 0.6% of its total portfolio in Kilroy Realty Corporation.

Without further ado, let’s move to Douglas Emmett’s value creation strategy.

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