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EOP Selling Out at the Top

Eop_logo I opened the grad class ACCT 5130 asking about the biggest real estate deal ever done-Equity Office Partners\, no one of course knew anything about it. Since then the question batted about in the financial press has been, who is the smartest? Sam Zell owner of EOP who sold, Vornado Realty that withdrew its bid, or Blackstone Group that won the bid at $55.50 per share. AT that price the REIT ( do you know what an REIT is, if not better look it up!) is yielding about 5% which one can get in T Bills and not have a worry in the world. 

Eop_graph Click on the graph at left to see just how successful Sam was!  Word of the bidding war got round at about $38-40.  Suspicion was that $45 would take the deal, but as you can see, Sam was considerably more clever in extracting a higher price.

Check out the article on page C18 ofhte 2/8/07 WSJ for more on this.

So who was the smartest here?  Well, for a a different take log on to Pete Kendall’s site-Socio Times. You may have to go back a day or two, see sidebar on the right of his site.  Pete makes the point that the skyscraper theory has buildings or the plans for the tallest buildings always occurring at market tops, each is a mirror of the other reflecting unbounded optimism.  HE even has a link to Sam Zell’s post of several year’s ago. It features a jingle about the markets set to the tune oif 50 Ways to Lose Your Lover.  Great Stuff that, and it perfectly caught the euphoria of 1999. 

Meanwhile, another sub prime lender has filed for bankruptcy. Gee could there be a connection between over speculation in residentail real estate and Sam’s decision to sell at the top of commercial real estate?  We report, you decide.

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4 responses to “EOP Selling Out at the Top”

  1. Jason Raper Avatar
    Jason Raper

    For those who don’t know what a REIT is…..sounds like a pretty risky proposition that can be very volatile to the market considering the extreme ups and downs that real estate seems to follow in the US….read below if you are interested.
    Jason
    The REIT Way
    January 31, 2003 | By Investopedia Staff, (Investopedia.com)
    The abundance of investment vehicles out there creates a challenge for the average investor trying to grasp what they’re all about. Stocks are the mainstay of investing, bonds have always been the safe place to park your money, options have increased leverage for speculators, and mutual funds are considered one of the easiest vehicles for investors. One type of investment that doesn’t quite fall into these categories and is often overlooked is the real estate investment trust, or REIT.
    So what exactly is a REIT? Well, it’s a trust company that accumulates a pool of money, through an initial public offering (IPO), which is then used to buy, develop, manage and sell assets in real estate. The IPO is identical to any other security offering with many of the same rules regarding prospectuses, reporting requirements and regulations; however, instead of purchasing stock in a single company, the owner of one REIT unit is buying a portion of a managed pool of real estate. This pool of real estate then generates income through renting, leasing and selling of property and distributes it directly to the REIT holder on a regular basis.
    Advantages
    When you buy a share of a REIT, you are essentially buying a physical asset with a long expected life span and potential for income through rent and property appreciation. This contrasts common stocks where investors are buying the right to participate in the profitability of the company through ownership. When purchasing a REIT, one is not only taking a real stake in the ownership of property via increases and decreases in value, but one is also participating in the income generated by the property. This creates a bit of a safety net for investors as they will always have rights to the property underlying the trust while enjoying the benefits of their income.
    Another advantage that this product provides to the average investor is the ability to invest in real estate without the normally associated large capital and labor requirements. Furthermore, as the funds of this trust are pooled together, a greater amount of diversification is generated as the trust companies are able to buy numerous properties and reduce the negative effects of problems with a single asset. Individual investors trying to mimic a REIT would need to buy and maintain a large number of investment properties, and this generally entails a substantial amount of time and money in an investment that is not easily liquidated. When buying a REIT, the capital investment is limited to the price of the unit, the amount of labor invested is constrained to the amount of research needed to make the right investment, and the shares are liquid on regular stock exchanges.
    The final, and probably the most important, advantage that REITs provide is their requirement to distribute nearly 90% of their yearly taxable income, created by income producing real estate, to their shareholders. This amount is deductible on a corporate level and generally taxed at the personal level. So, unlike with dividends, there is only one level of taxation for the distributions paid to investors. This high rate of distribution means that the holder of a REIT is greatly participating in the profitability of management and property within the trust, unlike in common stock ownership where the corporation and its board decide whether or not excess cash is distributed to the shareholder.

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  2. Jason Raper Avatar
    Jason Raper

    FYI last week KB Homes annouced a loss for the quarter and expects the same for the next 3 quarters. I believe that Dr. E mentioned that KB would be facing this very soon. Sucks to be right sometimes. Jason

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  3. Dennis Elam Avatar
    Dennis Elam

    ONe of the profs here over lunch remarked that some of the students are still trying to buy and flip houses in this market, I suspect it is way past the ideal time to be trying that, too many repos

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  4. Dennis Elam Avatar
    Dennis Elam

    Actually there are indices of REITS and it is a huge industry, simply a mutual fund of rentable real estate that has to pay out 90% of net earnings. If occupancy drops below about 75% however, the income goes to ZILCH which is what happened in the 1970s. now the economy is still strong, but how much is too much to pay for EOP, they buyer Blackwood has already flipped some of the properties for $7B, who will be the great fool? Especially now that the trust is yielding about t bill rates on the properties at these high prices

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