Buyout likely to rock commercial real estate
Private equity firm Blackstone Group won a bidding war for Equity Office Properties Trust on Wednesday with a $23-billion cash offer that could boost commercial real estate values and rents.
The deal, which came after rival Vornado Realty Trust dropped out of the competition, will be the second-largest leveraged buyout in history, excluding about $16 billion of debt. It promises to rock the real estate industry by raising the price of offices, shopping centers and other commercial properties for future investors, analysts said.
Tenants may also feel the effect as owners who paid peak prices for their buildings raise rents to help pay for them.
Shares of the nation’s real estate investment trusts jumped to new highs on the news that Equity Office investors approved the $55.50-a-share cash offer from New York-based Blackstone after Vornado dropped its $56-cash-and-stock bid.
New York-based Vornado concluded that the premium it would have to pay to top Blackstone’s latest bid would not be in its shareholders’ best interest.
“I think we’re pretty confident we got full value out of the transaction,” Equity Office Chief Executive Richard Kincaid said. Nonetheless, Kincaid said, the transaction “is a little bittersweet for all of us.”
Blackstone and Vornado had been locked in a bidding duel for control of Chicago-based Equity Office, founded by now billionaire Sam Zell, in what was the biggest-ever contest for a real estate investment trust.
The offer price represents a roughly 24% premium to Equity Office’s closing price of $44.72 on Nov. 17, the last trading day before Blackstone’s original offer Nov. 19.
Equity Office directors had recommended Blackstone’s lower bid because it was all cash and was expected to close by Friday. Vornado’s proposal included stock and could have taken months to close.
Although Blackstone is paying a hefty price, it should be able to make a good return on its investment, analysts said. It is expected to sell some valuable Equity Office assets, which include about 590 buildings and 105 million square feet of office space. Among them are Two California Plaza in downtown Los Angeles and AIG SunAmerica Center in Century City.
The deal suggests that commercial real estate prices just went up across the board, said analyst Jim Sullivan of Green Street Advisors.
“Estimates as to what office buildings were worth two or three months ago were too low,” he said. “It makes you step back and wonder if this revalues other sectors too.”
The price Blackstone will pay “is predicated on pretty substantial rent growth going forward,” Sullivan said.
That means tenants will be expected to either dig deeper into their wallets when their leases expire or look for new space. Vacancy rates have dropped over the last few years and rents have already climbed to record levels in many U.S. markets, including parts of Southern California.
The concern for Blackstone and other landlords going forward is whether the economy will continue to grow at a pace that lets businesses keep expanding, said analyst Craig Silvers of Bricks & Mortar Capital.
Unlike the early 1990s, however, property owners are unlikely to be overwhelmed by new competition because office construction is being limited by high building costs and the difficulty of getting government approval for new projects.
“Demand is a big risk,” Silvers said. “Supply isn’t and shouldn’t be for the foreseeable future.”
The last two years have seen a huge run-up in real estate investing and the trend will probably continue as private equity firms use debt to take over real estate investment trusts, he said. Wall Street frowns on REITs taking on similar debt because the industry got into financial trouble with debt in the late 1980s and early 1990s.
“I think you will see more REITs disappearing,” Silvers said
Equity Office shares dipped 60 cents to $55.45. Vornado, by contrast, leaped $8.75 to a record $135.75. Vornado shares had been held back in recent months by investors’ concerns over how much it might pay for Equity Office.
The deal news sent many REIT stocks to new peaks -- adding to huge gains the shares have racked up since 2002. A Bloomberg index of 138 REIT shares rose 2% to an all-time high.
A REIT allows individual investors to participate in large real estate ventures. Unlike other public companies, REITs must distribute 90% of their income to shareholders.
*
Times staff writer Tom Petruno contributed to this report.
More to Read
