Buyout fund in huge real estate deal

Times Staff Writer

Chicago real estate tycoon Sam Zell agreed Sunday to sell his Equity Office Properties Trust, the nation’s largest office portfolio, to the world’s biggest buyout fund for about $20 billion in the largest real estate deal of all time.

The buyer is Manhattan-based Blackstone Group, one of the most active real estate investors in the world with about 2,450 properties valued at more than $43 billion before the Equity Office acquisition.

Zell’s trust has nationwide holdings, including in Los Angeles, Orange County and San Diego. With the purchase, Blackstone Group will become one of the largest landlords in Southern California. Zell’s properties include Two California Plaza in downtown L.A. and AIG Sun America Center in Century City.


Zell’s trust said that adding the $20-billion purchase, plus the assumption of $16 billion in debt, made the deal the biggest leveraged buyout to date, surpassing the $33-billion purchase of hospital chain HCA Inc., announced in July.

That deal broke the record that Kohlberg Kravis Roberts & Co.'s $31-billion purchase of RJR Nabisco Inc. had held since 1989.

Equity Office shareholders will receive $48.50 a share, an 8.5% premium to Friday’s closing price of $44.72, the companies said in a statement.

The Equity Office board unanimously approved the offer for the Chicago-based real estate investment trust Sunday night. Acquirers of office properties are taking advantage of under- priced leases that will come up for renewal at higher market rates as vacancies decline and rents surge in markets such as West Los Angeles.

Sunday’s buyout announcement comes amid a deal-making bonanza for private equity firms, which have raised a record $170 billion this year, according to London-based consultant Private Equity Intelligence.

“Office properties are increasing in value in the eyes of private equity investors,” said Srikanth Nagarajan, an analyst at RBC Capital Markets.

The U.S. office vacancy rate fell in the third quarter to 12.96% from 14.13% in the same period last year, as asking rents for Class A space in Manhattan rose to a record $63.26 a square foot in October, according to Colliers International. New construction hasn’t kept pace with increased demand as the economy adds jobs, pushing up rents.

Blackstone has acquired 10 publicly traded real estate companies in the past two years, including CarrAmerica Realty Corp. It also acquired Trizec Properties Inc., another office REIT, through a venture with Brookfield Properties Corp.

Blackstone also owns Legoland in Carlsbad and three other Lego Group theme parks. In 2003, Blackstone bought a piece of Freedom Communications Inc., owner of the Orange County Register newspaper.

Blackstone in July raised a $15.6-billion fund, and is adding another $5 billion. In June, it raised $5.25 billion for the largest-ever fund for high-return real estate investments, the majority of which has been spent already. The real estate fund will provide all of the capital for the Equity Office acquisition.

The biggest acquisition of a real estate investment trust to date was General Growth Properties Inc.'s purchase of Rouse Co. for $11.3 billion in 2004.


Bloomberg News was used in compiling this report