Equity Office Properties Nears a Decision (EOD)

By Gregory S. Davis | February 02, 2007 AAA

Chicago-based Equity Office Properties (EOP), a real estate investment trust (REIT) founded by billionaire Sam Zell, is in the spotlight as the target in what could be the largest private equity takeover deal in history.

EOP, the largest publicly traded commercial real estate owner and property manager in the United States, has over 590 commercial properties and over 150 million square feet of office space in major metropolitan cities including New York, Los Angeles, Boston, Atlanta, Austin, Chicago, Miami and New Orleans.

Investors should leverage the excitement of this deal to introduce themselves to REITs that often pay attractive dividends while frequently being on the receiving end of negative sentiment from sell side analysts.

Just this morning, a consortium of investors led by Vornado Realty Trust (VNO) announced that it would trump the $38 billion bid offered by private equity firm Blackstone Group with a $40 billion, or $56 per share, offer of its own.

The Blackstone Group initially offered $36 billion or $48.50 a share on November 20th. Vornado Realty Trust countered with a $52 a share offer which was then surpassed by Blackstone's $54 a share offer before today's announcement. The financing for the deal is being handled by top shelf investment banks Goldman Sachs (GS), Bank of America (BAC) and Bear Stearns (BSC).

Tale of the Tape
New York City-based Vornado Realty Trust recognizes the value of the EOP nationwide portfolio of properties and was granted 9 days from Jan 22nd to introduce a formal bid. Vorando Realty Trust primarily owns more than 30 million square feet of commercial office space in New York City, Washington D.C. and Northern Virginia.

Over the past two years the Blackstone Group, also based in New York City, has been busy acquiring real estate properties including Extended Stay America, which has been re-branded as Extended Stay Hotels with its previously owned homestead chain CarrAmerica Realty Trusty, the owner of 285 upscale U.S. office properties, and U.S. REIT Trizec properties.

What's There To Consider?
Blackstone has a $500 million dollar break fee in place that EOP would have to pay to break its contract since it had already accepted their offer. The savvy Sam Zell, who describes himself as a professional opportunist, was able to initially negotiate a $200 million dollar break fee from Blackstone in order to keep EOP options open to new suitors which gave Vornado the opportunity to make an offer. EOP has announced that it will make a decision on Blackstone's offer by February 5th.

Equity Office Partners' Largest Shareholder Weighs In
Cohen & Steers Capital Management, the largest shareholder of EOP stock with more than 28 million shares, sees continued upside potential for EOP and the REIT sector. While EOP has been underperforming competitors in its market for the past 5 years, EOPs' rich stable of properties in major financial cities make the companies assets very attractive. James Corl, head of real estate investment at Cohen & Steers notes that inflation has peaked and that labor productivity is strong suggesting that there will be solid future demand for office space. Corl also points out that investments in income producing commercial real estate could also come from pension funds that have money sitting on the sidelines.

Where To Begin
EOP stock price increased 50% last year and is up another 15% year to date for 2007 and closed up yesterday at $55.55. For the individual investor, other REIT's of interest include Mack-Cali Realty Corp (CLI) and Brandywine Realty Trust (BDN). Each would be good places to look for an entry into the REIT market.

Cohen & Steers, who focuses on finding the best valued stocks for its portfolios, is already there as the single largest shareholder of both Mac-Cali Realty Corp and Brandywine Realty Trust which closed at $55.64 and $34.86 respectively on Wednesday, January 31st. Brandywine pays a 5.10% dividend while Mack-Cali Realty pays 4.5%.

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