Some REIT Executives
Tire of the Public Arena

A painting of an aging man in a wrinkled suit and loosened tie hangs in the entrance to R Squared LLC, a New York development company. He's wiping his sweaty brow with a handkerchief while trudging on a treadmill below an unrelenting sun.

He's a businessman going nowhere.

"It was the first piece of art we bought, because it symbolized what it was like the last five years we were part of a public company," says Gregg Rechler, a partner in R Squared.

In 2003, Mr. Rechler and his cousin, Mitchell Rechler, left real-estate investment trust Reckson Associates Realty Corp., a Melville, N.Y., company that had been founded by their fathers. While Gregg Rechler's brother Scott remains at Reckson, where he is chief executive, Gregg and Mitchell Rechler used their stock in the REIT to buy its industrial properties and returned to private real-estate development.

Like the Rechler cousins, some REIT executives bemoan the pressures of pleasing stock investors, securities regulators and Wall Street analysts.

In the past two years, executives at 12 REITs have announced deals either to take their companies private or sell them, abetted by large investors willing to pay a premium to assemble large real-estate portfolios quickly. And an apartment REIT, Town & Country Trust, is the subject of a bidding war.

"At the moment, the private-market crowd likely is making more money with less oversight and hassles," says John Lutzius, president of Newport Beach, Calif., research firm Green Street Advisors.

Chief executives who have taken REITs private often promote these transactions in market-friendly terms. For instance, Richard Ziman, chief executive of Arden Realty Inc., described his decision to sell his Los Angeles-based REIT as "all about maximizing shareholder value." Mr. Ziman sold Arden Realty to General Electric Co. in December.

But industry executives and others agree that many sellers are fleeing what they see as unreasonable constraints imposed by the stock market.

One oft-cited factor: the Sarbanes-Oxley Act, a corporate-governance law passed in 2002 that compels top officers at public companies to certify that their financial statements are spotless and have systems in place to ward off financial shenanigans. Executives from nearly every industry have complained about the costs and hassles of Sarbanes-Oxley, whose many supporters feel the act will help prevent another Enronesque fraud.

Gregory Mutz, chief executive of AMLI Residential Properties Trust, says costs related to Sarbanes-Oxley were a factor in his decision to sell his relatively small REIT -- it has assets of $2.1 billion -- to a Morgan Stanley real-estate fund. "It costs me as much to be public as it costs a REIT four or five times bigger than me," he says.

Compensation may also be an issue. Private real-estate developers are widely believed to be better paid than their compatriots in the public space. According to SNL Financial, a Charlottesville, Va., research firm, REIT executives whose companies have stock-market values of at least $500 million earned median total compensation packages of $976,275 in 2004. Some private developers earn millions of dollars.

"If the stock market, as guided by analysts, underestimated the value of the company, it's reasonable that many REIT executives would want to realize the value of the portfolio by selling to private investors," says Paul Adornato, senior analyst for REIT research at Harris Nesbitt.

It wasn't always like this. The real-estate crash of the 1980s made it nearly impossible for many property developers to get money from banks or private lenders. Throughout the 1990s many converted their companies to REITs, and investors provided developers much-needed capital in return for the tax advantages that REITs convey.

The Rechlers took the business that had been founded by their fathers public in 1995, a decision that at the time seemed like the obvious thing to do, Gregg Rechler says. But the cousins grew increasingly frustrated over time when they felt their hard work wasn't always rewarded with a commensurate stock price.

In 1999, for example, Reckson had low vacancy rates on its properties and strong revenues, but the REIT's stock languished amid the tech-stock craze. Meanwhile, securities analysts reproached Reckson's decision to move beyond the suburbs and buy in Manhattan -- a move that turned out to be a good one -- and also knocked the company for having too many family members involved. Reckson also passed up opportunities to develop some properties because investors frowned.

So the cousins started the private company, R Squared, and signed on with the Fortunoff family to develop the former Saks Fifth Avenue site in White Plains, New York. That property became The Source at White Plains, a successful urban retail center.

The fun they had with that project crystallized in the two Rechlers' minds that they no longer wanted to be part of a public company.

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