The EOP Buyout: A Big Gamble for Private Equity by Andrew Bary
EOP 1-yr chart:
Summary: Blackstone Group's outbidding of Vornado Realty Trust (VNO) in the purchase of Equity Office Properties (EOP) might leave the private equity firm overstretched, and mark the top of the REIT market. Blackstone bid $55.50 a share, or $39 billion including $31 billion of debt, with the intention of selling some of EOP's prime 585 buildings at top dollar and raising rents for properties it will keep. But Blackstone's purchase of Equity Office is highly leveraged as the equity it committed to the deal is likely worth only 11% of assets, versus a more normal 50% for REITs, and interest on the debt may easily exceed the 5% current yield on the portfolio. So Blackstone could win big or see its investment wiped out depending on the outcome: selling the properties for 10% more than their cost would mean a $4 billion profit, but a sale of the portfolio for $35 billion would wipe out Blackstone's equity. Blackstone is now vulnerable to a downturn in the commercial real estate market, though the office market has of late been improving in prime markets where EOP operates, mainly midtown Manhattan, Boston, Chicago and San Francisco. Perhaps more significant, Vornado CEO Steve Roth, "a sharp operator with a value bent", refused to top Blackstone's bid, and Equity Office CEO Sam Zell, "a shrewd deal maker", is selling out for a personal gain of about $900 million "at what could be the top of the market".
Related Links: Equity Office Properties: Sam Zell's Genius, Blackstone Group's 'Zell Buyout' Is Questionable At Best, Equity REITs Won Big in 2006: Will They Revert to Mean?