SAM ZELL

It's been called "a conundrum," "groundbreaking," "massive," "the mother of all trades," and "an earthquake for the REIT industry" in media coverage circulating around the globe—all descriptions that denote the heft and significance of the proposed $36 billion acquisition of Equity Office Properties Trust (NYSE: EOP) by Blackstone Real Estate Partners, an affiliate of The Blackstone Group. Surprisingly, most of these stories do not address on the deal's benefits to the public REIT market. Yet, these benefits are obvious to the man at the center of the brouhaha, Equity Group Investments LLC founder Sam Zell. According to him, the EOP transaction and other REIT consolidations are signs of a thriving industry.

"The whole REIT movement that started 13 years ago is about the commercial real estate market becoming a part of the rest of the capital markets," he says. "Part of that movement is the normal bids for control that happen with all other public companies. These privatizations that have been happening are validation of REITs' entrance into mainstream capital markets."

Christopher Haley, a managing director with Wachovia Securities, agrees. "This deal should keep REIT juices flowing. The recycling of capital from this privatization will keep the real estate sector up."

Zell, who is still chairman for three publicly traded REITs, Capital Trust Inc (NYSE: CT), Equity Lifestyle Properties, Inc. (NYSE: ELS) and Equity Residential (NYSE: EQR), says the EOP deal's size separates it from other transaction activity in 2006.

"This was the result of Blackstone making us an offer of such magnitude that I was required to present it to our board to consider," Zell says. "We had received interest from other companies previously, and had made a conscious decision not to go forward with buyout discussions. Then out of the blue, unsolicited, the Blackstone offer came."

However, Zell does say there are similarities between his company and others in inadequate valuation, which could have served as a potential catalyst to so much private interest. "The analytical community has done their valuations with an agenda. All you have to do is look at the analyst valuation prices versus what the companies have traded for. We've ended up with NAV values that were ridiculous. That's an indictment of the analyst valuation process."

Jahn Brodwin, a partner in charge of Schonbraun McCann Group's New York office, agrees. "These deals serve as loud wake up calls to the public markets that they need to do a better job in analyzing the real estate the same way a private owner/operator would."

Brodwin continues, "You have investors who will say that Sam is right and companies are not being valued fairly. Maybe we have to sharpen our pencils and find out what the companies are worth to us."

Prior to the mammoth announcement on Nov. 20, 2006, Equity Office was the nation's largest owner of office properties, with 590 buildings and more than 105 million square feet of office space in the major metropolitan markets. This deal—the largest leveraged REIT buyout in history—culminated a year of Blackstone acquisitions in REITs. In the last 12 months, the firm has nipped CarrAmerica Realty Corporation, MeriStar Hospitality Corporation and Trizec Properties, Inc. This deal is anticipated to close by the end of the first quarter of 2007, and will make Blackstone one of the nation's largest owners of real estate.

"We've been pretty active in the real estate private equity sector for a number of years now," said Blackstone managing director Frank Cohen during NAREIT's Annual Convention last November. "Over the last three or four years, we've completed about 12 or 13 public to private transactions."

Brodwin says Blackstone's deals could find public offerings in their wake. "There are still those who want to buy securities in real estate, and with these privatizations there comes a cycle of new companies going public," he says. "At the end of the day, the public markets still prove to be efficient."

Efficient and evolving, according to Zell. "Despite the fact that we've been at this for 13 years, the REIT market is still in an embryonic stage. It's still early in the REIT cycle of creating a truly liquid public market. Companies going public is terrific—companies going private is terrific."