Zell’s Company to Become No. 1 Landlord in State
Billionaire Sam Zell’s Equity Office Properties Trust said Friday that it has agreed to buy Cornerstone Properties Inc. for $2.8 billion in cash and stock, gaining greater presence in the high-technology-fueled West Coast office market.
The combined company would be the largest landlord in California, which has the lowest vacancy rates and highest rental growth in the U.S. The purchase increases Equity Office’s total holdings by 24% to 380 buildings and 95.5 million square feet of space.
Chicago-based Equity Office, already North America’s largest office property owner, said Cornerstone shareholders could elect to receive $18 a share in cash or stock, a 21% premium to Thursday’s closing price of $14.88. Equity Office also will assume $1.8 billion worth of debt.
The purchase is a bet that the Internet, software and computer industries will continue to lead the economy and grow for years to come.
“If Zell did this deal four years ago, it would have been a much better play,” said Matt Troxell, a portfolio manager with AEW Capital Management, which owns 1.8 million Equity Office shares. “But the bottom line is that money is going to continue to be spent on technology, it’s just that the names of the companies getting that money might change.”
“The growth in the high-technology industries has the potential to create demand for space greater than the ability to supply that space,” Zell said.
Cornerstone shareholders can either take cash or swap each of their shares for 0.7009 share of Equity Office.
The San Francisco, San Jose and East Bay markets, where the combined company would own 80 buildings with 11 million square feet of space, has been seeing rents rise as much as 20% per quarter. Fueled by rapid growth in Internet, software and other high-tech companies, occupancy rates are below 5% in these areas, less than half the national average. About 38% of its earnings will come from properties in the West.
The company also gains Cornerstone’s development unit, William Wilson & Associates, an experienced West Coast developer that Cornerstone bought for $1.8 billion in 1998. Wilson has about $884 million in projects under development, adding to the more than $500 million underway by Equity Office.
Equity Office has been the most active buyer of properties since going public in July 1997, spending about $8.5 billion. Some of its properties include New York’s Worldwide Plaza and the tower that houses Chicago’s Mercantile Exchange. Its Los Angeles properties include Two California Plaza, 550 S. Hope St. and 10880 Wilshire.
Among New York-based Cornerstone’s 84 office properties and 17 million square feet of space is Wells Fargo Center in Sacramento, Norwest Center in Minneapolis, Washington Mutual Tower in Seattle and Wilshire Palisades at 1299 Ocean Ave. in Santa Monica.
The purchase is expected to be completed in the third quarter and add “modestly” to earnings this year.
Equity Office shares fell $1.50 to close at $24.19, and Cornerstone rose $1.94 to close at $16.81. Both trade on the New York Stock Exchange.
