Press de-REIT
Markets work because they harness the law of economic gravity to the mystery of human self-acquisitive competitiveness. Over time, they reach equilibrium of sorts, or at least a gravitic framework, where certain things are presumed to be true:
· Investment flows into the most efficient capital-raising vehicle.
· Capital flows from the most risk-tolerant (or risk-perceptive) source.
· Risk migrates to those best able to bear it.
We’re just observantly looking for the best deals
In halcyon days of yore, real estate investment was the province of large institutions — insurance companies and banks, the epitome of ‘establishment.’ That was inefficient: illiquid, thinly traded, and poorly accessible.
That Equity Office Properties would turn its back on the equity markets is in itself momentous, as [founder and chairman Samuel] Zell had championed the concept of publicly traded real-estate companies. He evangelized for the REIT structure as a way to make real-estate a liquid investment and increase transparency in what had been a notoriously behind-closed-doors business.
Zell knew the value of a buck or two
Over the years and decades, the drive for efficiency has meant the creation of ever-smaller, ever-more-broadly held investment instruments, either in mortgage securities or in equity ownership via real estate investment trusts (REITs). Because they combine tax efficiency (tax transparency and avoidance of double taxation) and liquidity (freely tradable and publicly listed), REITs have long appeared the optimal large-holding vehicle for income-producing property. Yet, even as the British are proposing to introduce REITs, a remarkable inversion is taking place here in
The real-estate arm of private-equity firm Blackstone Group last night reached a $20 billion deal to acquire Equity Office Properties Trust, the nation’s largest office-building owner and manager, as Wall Street wrapped up at least $52 billion of deals on one its biggest deal-making days ever.
If completed, the deal to take Equity Office Properties private would be the largest such transaction in history — and possibly the largest real-estate deal ever — after factoring in the company’s $16 billion in debt.
The private equity managers believe they can beat current market returns, as they are offering a slight premium:
Blackstone will pay $48.50 for each share of Chicago-based Equity Office Properties. That represents about an 8.5% premium to the company’s closing price of $44.72, down 13 cents, in
Is time running backwards here?
Depends on how you look at it, doesn’t it?
What could motivate this shift, from the efficient public markets back to large private holdings?
The continuing boom in deal making stems from several factors, including a world-wide glut of capital.
Capital from outside the
Interest rates are also near historic lows [Gee, I wonder why? — Ed.], giving buyers ample access to the credit they need to pull off massive transactions.
Some of it has to buy equity ownership:
Meanwhile, private-equity firms, which seek to acquire companies and resell them at a profit, have been showered with tens of billions of dollars by investors including pension funds, state retirement plans and wealthy individuals.
The real-estate sector — which has been home this year to $264 billion worth of deals, up nearly 50% from 2005, according to data from Thomson Financial — has been one of the most fertile for acquisitions.
Blackstone has emerged as the sector’s most formidable investor in recent years, purchasing six publicly traded hotel groups and three commercial real-estate firms. The private-equity firm’s investment thesis for office buildings has been relatively simple: Take comfort in the fact that office locations are expensive to replace, and expect that corporate rents will rise as part of general economic growth nationwide.
Its latest target, Equity Office Properties, either on its own or through partnerships, owns more than 590 office buildings in 25 markets. Among its more notable properties are the AIG SunAmerica Center in
REITs were created in 1960 as a passive-investment vehicle.
The 60’s will be good for you!
As part of their authorization, they have this shark-like requirement to flow their income through themselves. This makes aggregating capital for growth difficult. Further, REITs divide their income into ‘good’ (real-estate derived) or ‘bad’ (non-real-estate-derived) and undertake various accounting machinations to sanitize ‘bad’ income.
The 1970s: a rickety investment platform?
In the mid-Seventies, REITs grew too quickly and were used to acquire everything from unsold condominiums to subdivision land in
[Equity Office and Equity Residential founder Samuel] Zell argued that making real estate public would help the boom-and-bust industry moderate its cycles. More crucially, Mr. Zell also promoted REITs as a better way to gain access to capital financing, the life-blood of real-estate owners and developers, than private deals.
Mr. Zell was right on both counts. First-mover growth-oriented REITs like AIMCO and Equity Residential (Mr. Zell’s apartment sibling to Equity Office) used their higher multiples to absorb private owners and smaller, stodgier REITs, in the process becoming the nation’s largest owners and managers of rental apartments.
Yet the Seventies memories lingered,
It took a long time to recover from the trauma of this vision of high style
and the new public REITs postured themselves as righteously conservative, especially on borrowing and leverage:
Speculation about Equity Office Properties’ prospects for going private has simmered since founder Samuel Zell admitted to a “flirtation” with the California Public Employees Retirement System (CALPERS) last spring. But some investment bankers and analysts discounted the speculation, believing Equity Office’s debt load was too high. Even as the company has worked to reduce debt and reduce its holdings in weaker markets, Michael Knott, an analyst with Green Street Advisers, a real-estate research and trading firm, placed the chances of Equity Office being bought at only 20% as recently as two weeks ago.
What turned the tide? For one thing, the financial ecosystem has continued to evolve, with large debt capital becoming readily available privately:
With the massive amounts of private capital that are available to real-estate developers and the alternative financing methods, such as commercial mortgage-backed securities (CMBS), that have boomed in the last five years, real-estate companies have become less enamored of public markets.
Second, Wall Street is fickle and amnesiac:
“Sock it … to me?”
Equity Office Properties, which went public in 1997, has been the most prominent office-building REIT, but hasn’t been much loved by Wall Street analysts. For years, the company argued that a big REIT could benefit from economies of scale across a nationwide market, even as some smaller REITs outperformed it by exploiting a more intimate knowledge of just a few markets.
Over the past five years, Equity Office Properties has underperformed its office peers and the real-estate sector as a whole. Its five-year return, including dividends, is 108.6%, compared with 149.5% for all office REITs, according to SNL Financial. The average for all REITs is 182.8%.
I have no idea whether Equity Office is properly valued or undervalued. Real estate, the ultimate long-term asset, is often mispriced in publicly traded vehicles, even REITs, whose focus is short-term. To his credit, Mr. Zell (one of the nation’s richest men, and entirely self-made) has tended to put his shareholders first:
In an interview last summer, Mr. Zell pointed out that Equity Office Properties had no barriers such as a shareholder rights plan — or so-called poison pill — to prevent it from being sold, and that he would consider any offer at any time. “We are very shareholder friendly. We always do whatever is in the best interest of shareholders,” the REIT’s chief executive, Richard Kincaid, said in a conference call with analysts last month, in response to a question about the possibility of a takeover.
Very shareholder-friendly
Mr. Zell has long been regarded as one of the sector’s shrewdest investors. And he is exiting:
Mr. Zell isn’t expected to remain an active part of the company, people familiar with the matter said. Equity Office said last night that neither management nor its trustees are participants in the buying group.
In the past few years, Mr. Zell, though remaining chairman, has ceded day-to-day responsibility for running the company to Mr. Kincaid. And much of his interest and time has been more focused on his private pursuits, particularly his international investments.
Even allowing for Mr. Zell’s admirable continuing entrepreneurial curiosity, when he steps to the door, it invites questions.
What does it mean Zell’s on the run?
Where Equity Office goes, might Equity Residential follow? Is this beginning of an end to an era?
