There are several theories about what keeps REITs flying. There’s also a growing chorus of bears who warn that we’re near a top for the asset class. But whatever your view, the news of a private-equity fund’s unsolicited buyout offer on Sunday for Equity Office Properties (NYSE: EOP) offers one more reason to think that the game’s not quite up in the long-running bull market for publicly traded real estate securities.
EOP, the largest REIT and one that’s in the S&P 500, accepted a $36 billion buyout offer from an affiliate of the Blackstone Group, a New York private equity firm. Blackstone will acquire all the outstanding common stock of EOP at $48.50, or an 8.5% premium over last Friday’s close.
The deal for the nation’s largest office landlord raises eyebrows on a number of levels. For starters, it’s reportedly the largest buyout package in history. The Wall Street Journal (subscription required) reported that the price tag “implies a ‘cap rate’, or rental yield, of about 6% — well below the 10% at which real-estate investment trusts, or REITS, have historically traded.” The article adds that the terms suggest that Blackstone is valuing EOP at a 17% premium to net asset value, according to analysis by Citigroup. “That’s unusual — even for Blackstone,” the story advised. “It paid no more than 4% premiums to NAV when it acquired Trizec Properties and CarrAmerica. And even those were seen as pricy at the time.”
Rich or not, the EOP deal is a sign of the times. Indeed, this year has witnessed a surge in mergers and acquisitions of REITs. Keven Lindemann, director of real estate for SNL Financial, told the New York Times today that 21 REITs in 2006 have announced that they’re being bought by another REIT or private firm, and that more were probably coming.