The commercial real estate market erupted in heavy speculative buying today following a $19 billion deal to take famed investor Sam Zell’s Equity Office Properties Trust private, signaling to investors that other real estate companies also could be snatched up.
The Blackstone Group’s blockbuster agreement to buy the nation’s largest office landlord – whose trophy properties include WorldWide Plaza in Manhattan, the Civic Opera building in Chicago and Columbia Center, Seattle’s tallest tower – demonstrates that the U.S. commercial market hasn’t lost its zing. It also will further reduce a shrinking public real estate market for investors.
Analysts, though, said the deal may be more a reflection of the current hunger among capital-flush private equity firms for leveraged buyouts in general than a barometer of the commercial real estate sector.
“It’s probably not as much industry-specific as it is that people want to get in on LBOs,” said Linda Varoli, vice president of research at Wall Street Access, an institutional brokerage firm.
“Sam Zell built this company, so it’s kind of surprising he would want to sell it. But when you get offered a really good price like that, you have a responsibility to shareholders.” Blackstone agreed to pay an 8.5 percent premium to the closing price of Equity Office last Friday, and is taking on close to $17 billion in debt. That gives the deal announced late Sunday night a total value of $36 billion, which it said will be the largest private equity transaction ever.
It’s the New York-based private equity firm’s third purchase this year of a real estate investment trust and its 10th in two years, including 2006 deals for CarrAmerica Realty Corp. and, with partner Brookfield Properties Corp., for Trizec Properties Inc.
Real estate investment trusts are public companies that own and operate real estate and don’t pay corporate income taxes so long as they distribute almost all their income to shareholders as dividends. They are particularly popular among well-off investors because of their tax benefits, with many of the dividends either non-taxable or qualifying for reduced taxes.
Shares of Chicago-based Equity Office rose $3.42, or 7.7 percent, to close at $48.14 on the New York Stock Exchange after reaching an all-time high of $48.52. Those in numerous other REITs also jumped on the possibility of other deals, with Boston Properties Inc., Brookfield Properties, Vornado Realty Trust, Mack-Cali Realty Corp., Maguire Properties Inc. and SL Green Realty Corp. all hitting 52-week highs.
“The fact that Equity Office could be taken private means no REIT is safe,” said Morningstar analyst Arthur Oduma. “That obviously excites investors who own REITs.” Equity Office owns 580 U.S. buildings totaling more than 108 million square feet in 16 states and the District of Columbia. It was founded in 1976 by Zell, the Chicago investor who early in his career earned the nickname “Grave Dancer” for his talent for spotting undervalued properties.
The 65-year-old Zell remains chairman of the company, which went public in 1997, but is not part of the buyout group. His company declined comment on the deal beyond the Sunday night statement of current CEO Richard Kincaid, who said: “Our ultimate goal has always been to maximize shareholder value, and we believe we have done that through this transaction.” Equity Board’s board already has approved the offer by Blackstone’s real estate arm of $48.50 per share – an impressive figure for a stock that traded below $30 as recently as February.
Several analysts said they doubt any rival bidders will emerge because of the huge size of the deal, which is expected to close in the first quarter of 2007 pending approval by regulators and shareholders.
Jonathan Gray, Blackstone’s senior managing partner, called the deal a “landmark transaction” in the announcement but through the company declined further comment Monday.
The recent REIT transactions haven’t significantly increased the company’s focus on commercial real estate, according to spokesman John Ford. He said about a fifth or a quarter of total investments remain devoted to real estate. Blackstone also operates hedge funds, advises on mergers and acquisitions, and runs a collateralized loan business.
About 60 percent of its capital is derived from state pension funds, with the rest coming from corporate pension funds, foundations, endowments and financial institutions.
Zell still owns about 1.9 million shares, or 1.7 percent, of Equity Office, according to its proxy statement. Analysts aren’t quite ready to write him off as a player in real estate.
“There’s no telling,” said Oduma. “He could go back and start pulling together another portfolio and take it public a few years down the road.” But, he added, “Sam is a smart real estate investor and he knows a good price when he sees one.” Equity Office has several premium assets in New York City in its portfolio, including 527 Madison Ave., 1301 Avenue of the Americas and Park Avenue Tower. Other major holdings include the Rowes Wharf building and One Post Office Square in Boston, twin towers housing the Chicago Mercantile Exchange and 161 North Clark in Chicago, the One Market complex in San Francisco, AIG SunAmerica Center in Century City, Calif. and Two California Plaza in Los Angeles.
