by Jon C. Ogg

The Blackstone private equity buyout of Equity Office Properties Trust (EOP) is a real game changer for Office REIT shares.  This office property sector has been consolidating in the recent years, but this is the equivalent of China buying the State of California.  the total deal is valued at a whopping $36 Billion if you includ ethe enterprise value with some $16.5 Billion in debt.

You keep hearing speculation of a private equity bubble out there, but private equity’s attempt is to make more money off of inefficiencies where public companies can either be run better as private companies or where cash flows from a certain competitive stance are worth taking a company over for its predictable cash flow to provide an equivalent investment yield for the investors.  The size compared to values makes you wonder if the stated values of the properties that this holds are understated or deemed a bargain, or if this deal is meant to invest a huge chunk of cash simultaneously.  So is it a bubble, or is it a lump-sum transaction with the intent of paring off properties?

Sam Zell, the well known CEO of Equity Office (EOP) is also not involved in this deal other than the fact that he’ll be cashing out and becoming worth even more gazillions riding his Harley. 

What is even more substantial here is that while EOP does have many key trophy properties and while it is the largest Office Properties real estate investment trust out there, it is not at all considered a bargain on an overall comparative basis.  In fact, its size and leadership actually has a premium to many other high-value office REITs.  The company trades at about 2.5 times stated book value, its P/E ratio has gone way out of whack because of some balance sheet and operating changes of late, and its dividend yield is lower than many other office REITs.

This has many other office REIT stocks with market caps of $2 Billion or more trading higher right after the open.  Here is a partial list:

Boston Properties (BXP) +7.6% at $116.86; $13.65 Billion market cap.

Liberty Property Trust (LRY) +2.5% at $48.37; $4.35 Billion market cap.

Mack-Cali Realty (CLI) +6% at $52.65; $3.3 Billion market cap.

Brandywine Realty (BDN) +1.1% at $33.32; $3 Billion market cap.

Alexandria Real Estate (ARE) +2.4% at $100.57; $2.9 Billion market cap.

HRPT Properties (HRP) up 1.8% at $11.93; $2.5 Billion market cap.

Corporate Office Properties (OFC) up 2.1% at $48.05; $2.05 Billion market cap.

Maguire Properties (MPG) up 4.5% at $43.76; $2.05 Billion market cap.

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