Thursday, February 15, 2007

Blackstone´s John Gray Afraid Record Buyout Will Fail

and i believe they should be worried. read what the management from eop had to say back in october about the markets.

und ich denke das sollten die auch. hier einige zitate von eop aus dem oktober

"it is a little bit crazy out there"

we are having $3 b asset sales on the block ( with an estimated gain of $700 mio). if we would have no tax restriction we would like to sell billions more. money should be used to pay back debt.

deleveraging is key.

powerhouse balance sheet is key goal

deals done (from others) in the market at a caprate of 4,5%.
very hard to make numbers work. very very aggressive bidding's.

but then blackstone came and offered round about over 30% premium and leveraged the former eop to the hills

dann kam blackstone und hat mal eben 30% aufschlag geboten und eop mit schulden überhäuft....

Feb. 14 (Bloomberg) -- Henry Kravis celebrated his 1989 bagging of RJR Nabisco Inc., at the time the biggest leveraged buyout ever, by treating colleagues to lobster, Dom Perignon and a three-foot cake festooned with RJR Nabisco products at New York's Pierre Hotel.

Not so Jonathan Gray, who orchestrated Blackstone Group LP's purchase of Sam Zell's Equity Office Properties Trust for $39 billion including debt. That's now the biggest buyout ever. Before Gray's lips touched a glass of celebratory champagne, he was trying to sell many of the buildings he had just arranged to buy.

Fear is driving Gray, the 37-year-old co-head of Blackstone's real estate team. Gray is so scared his deal will meet a fate similar to Kravis's RJR Nabisco deal, which saw its profits eroded by debt costs, that he found a buyer for eight of Equity Office's Manhattan skyscrapers before Blackstone even owned them.

Now he's scrambling to sell buildings in cities with the highest rents and lowest vacancy rates -- even properties Blackstone would rather have kept.

New York Sales
A bidding contest with Vornado Realty Trust for the 540 office buildings in Zell's portfolio drove up the price Blackstone paid by more than 14 percent, forcing the New York-based private-equity firm led by billionaire Stephen Schwarzman to borrow $31.9 billion, or 82.5 percent of the sale, plus $3.5 billion in bridge equity. With the clock ticking on that debt, Gray has embarked on a selling spree.

Macklowe Properties Inc., the owner of New York's General Motors Building, bought eight Manhattan office buildings for $7 billion on Feb. 9, the same day Blackstone closed on the purchase of Equity Office. ...

Gray also sold 19 properties in Washington and 17 in Seattle to Boston-based Beacon Capital Partners Inc. for $6.35 billion and 17 buildings in Portland, Oregon, to San Francisco-based Shorenstein Co. for $1.2 billion, according to three people with direct knowledge of the transactions.

Before turning his attention to office properties, Gray led a series of hotel acquisitions for Blackstone after values plummeted in the wake of the 2001 terrorist attacks. Those investments, which include Extended Stay America Inc.,
have produced returns in the high double-digits for Blackstone, according to investors. ......

Then, as hotel values started to go up and it became harder and harder to find good values, he shifted his focus to the office sector

thanks to

Gray is ``likeable, well-liked, well-trusted in a field where no one trusts anyone,'' said Blackstone's James.
Gray must fight the perception among some potential buyers that Zell's exit must mean prices for office buildings are at the height of the market.

``If Sam sold, it must be a good time to sell,'' said Richard Stein of Mesirow Financial Real Estate in Chicago, which manages $30 billion in assets. ``As smart as the Blackstone guys are -- and they're all smart -- I would never want to be buying when Sam is selling.'' ( i agree 100% management is really great (no sarcasm!).

Top of the Market?
Commercial real estate is more expensive relative to other income-producing assets than it's been for two decades, adding risk for buyers. While higher rents have fueled a rally in office REITs, higher prices have whacked the securities' yields.

Office REITs are offering 100 basis points on average less than the average corporate bond, a reversal of their historic premium to corporate bonds, according ...... The crossover happened in 2005,

Another measure of the high price Blackstone is paying for Equity Office is the capitalization rate. The cap rate is the net operating income (rents minus operating expenses), divided by the purchase price. The lower the cap rate, the more expensive the property.

Difficult Returns
Blackstone is buying Equity Office at a cap rate of about 5.3 percent, a record low for a REIT purchase, according to Green Street. In 2006, Blackstone and Brookfield bought Trizec at a 5.7 percent cap rate and Blackstone bought CarrAmerica Realty Corp. at a 6.3 percent cap rate, .

``It's going to be difficult for a buyer to make a substantial rate of return on this purchase,..

Institutional investors with about $12 trillion in assets have turned bearish on REITS and became net sellers for the first time in two years in November, according to the brokerage arm of State Street Corp., the world's third-biggest custodian of assets. The investors have sold as dividend yields on the trusts tumbled below that of government debt.

Blackstone will contribute about $3.75 billion of equity financing and receive $31.9 billion of debt financing to fund the purchase, according to a regulatory filing.

Bank of America Corp., Bear Stearns Cos., Goldman Sachs Group Inc. and Morgan Stanley are providing the $3.5 billion bridge loan. Those four are joined by Citigroup Inc., Wachovia Corp. and affiliates of Credit Suisse Group and Deutsche Bank AG in providing financing to Blackstone. ( all the big players involved ...of leats none of their own pe arms is involved.....immerhin haben die banken nicht mit ihren eigenen pe abteilungen zugeschlagen)

disclosure: short reits (iyr)

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