Experts Debate Value of $36B EOP Buyout

The board of trustees of locally based Equity Office has agreed to a buyout by the aggressive Blackstone Group in a deal that is being valued at $36 billion. That includes some $16 billion in debt, according to reports. EOP owns 580 buildings--some 108.6 million sf--in 16 states. Equity's board of trustees has unanimously approved the merger agreement and has recommended the approval of the transaction by common shareholders.

Analysts and some shareholders say the buyout is a great deal. A press release touts the $48.50 price per share is an 8.5% premium more than Equity Office's closing share price on Nov. 17 and a 20.5% premium more than the company's three-month average closing price.

However, not everyone agrees Blackstone made the right decision. Zaya Younan, founder and chief executive officer of Los Angeles-based Younan Properties, is running a company that is also on a purchasing tear. The firm recently closed on the sale of 2.1 million sf of office properties in Chicago and Dallas, and Younan says the firm will be investing another $2 billion in Chicagoland. Younan says he is surprised Blackstone paid about $330 per sf in markets that aren't yet that solid.

"That's more than we would have paid," Younan says. "There's not too many properties out there that trade for $330 per sf. We just purchased 200 N. LaSalle in Chicago for about $160 per sf, and that was at 80% occupancy."

He says rents are still very soft in some markets, and that the capitalization rate is so compressed, returns are going to be at a minimum. "I think they're going to have some digestion problems, that's too many properties, at too large a size in too many states," Younan says.

An Equity spokeswoman says the company is not commenting on the deal. A spokesman for Blackstone tells GlobeSt.com that he's not surprised that people are arguing about the purchase. "That's par for the course. They're disagreeing? What else is new?" he tells GlobeSt.com. He says Blackstone is still dotting the "i's" and crossing the "t's" on the deal, and will be able to speak more after the shareholders vote, which has not yet been set.

Experts are also talking about what this sale means for the separation of public and private property owning. Mike Straneva, head of Ernst & Young's Transaction Real Estate practice, says massive amounts of investor capital looking for alternative holdings, combined with the intelligence of future-looking Blackstone and profit-savvy EOP founder Sam Zell, are just a few reasons why more REITs may be vulnerable to more sale speculation. "The flow of capital is so large into real estate, it's very difficult to buy single office buildings," Straneva tells GlobeSt.com. "You have to buy entire companies to fulfill pension and endowment fund needs."

Dale Anne Reiss, global leader of Ernst & Young's real estate, hospitality & construction practice, says though there are many office REITs still going strong, such as Voranado and Boston Properties, the trend of private firms taking over public real estate companies could be an alarm. "At what point will the transparency that REITs helped create, will their momentum disappear or fade?" Reiss asks.