Another Private Equity Deal That Went Bust Within 24 Months

Commercial Real Estate (CRE) & Private Equity...... When ever you hear this combination during the next few years it will be almost to 100 percent in connection with disastrous deals...... No surprise that Blackstone & Fortress are involved once again....... :-) The enitire CRE complex will be the next very very big headache for the balance sheets from banks...... It´s a safe bet that we will hear similar stories also from the LBO front on a regularly basis ( see Tribune Co. Could Be Flirting With Bankruptcy NYT) ......

Wann immer in den nächsten Monaten die Begriffe Commercial Real Estate & Private Equity im Zusammenhang auftauchen kann man sicher sein das es sich fast zu 100% um das implodieren von Mrdschweren Deals handelt...... Sicher auch kein Zufall das die Namen Blackstone und Fortress in schöner Regelmäßigkeit auftauchen..... Der gesamte Bereich der gewerblichen Immobilien wird noch für extrem große Kopfschmerzen bei den Bänkern und entsprechend große Löcher in den Bilanzen der Banken sorgen...... Wir werden uns an ähnliche Schlagzeilen vor allem auch im Zusammenhang mit den berühmt berüchtigen LBO´s von "Pirate " Equity sowie fremdfinanzierten Übernahmen im allgemeinen ( z.B. CONTI/SCHAEFFER..... ) gewöhnen müssen..... UPDATE: Erster großer Autozulieferer meldet Insolvenz an Manager Magazin

WSJ Extended Stay Could Transfer Chain to Lenders
Extended Stay Hotels Inc. is in early talks that could result in turning the hotel chain over to its lenders, a sign of the deep trouble awaiting the commercial real-estate business.

Extended Stay's difficulties signal a new phase of distress in commercial real estate, because they arise directly from the weakening economy. Until now, problems have mostly involved developers unable to obtain refinancing for otherwise healthy operations.

Lightstone Group LLC, Lakewood, N.J., bought Extended Stay from Blackstone Group LP for $8 billion in April 2007. The deal was highly leveraged, hastening Extended Stay's troubles. The chain has no major debt expirations due soon

But Extended Stay's cash flow is crashing, as business activity across the country contracts. That is putting fewer people in its 684 U.S. and Canadian hotels, used by corporate travelers on long assignments. Extended Stay has 13,000 employees. It is too soon to say if a takeover by lenders would result in layoffs or hotel closings, according to people familiar with the matter.

As conditions deteriorate, Extended Stay has been forced into discussions with its lenders, and people involved in the talks say a transfer of ownership could come within a month or two. Extended Stay has recently hired Lazard Ltd. as financial adviser and New York law firm Weil Gotshal & Manges as bankruptcy counsel......

During the real-estate lending boom, Wall Street originated $600 billion of commercial mortgage-backed securities. The default rate on commercial mortgage debt has remained near historic lows, even while residential-related debt suffered a severe downturn.

But that is now beginning to change, sending new shock waves into much-battered banks, private-equity funds and other financial institutions that participate in the $1 trillion commercial real-estate debt market. Hotel landlords typically are the first to feel the pain in a downturn because hotels have the shortest leases in real estate -- one night at a time.

bigger/größer Thanks to Calculated Risk

> I just cannot wait for this deal Hilton's $20 Billion Sale to Blackstone Is Completed to blow up........

> Ich denke es wird nicht mehr lange dauern und der absolute Königsdeal unter den Hotelbuyouts ( Hilton's $20 Billion Sale to Blackstone Is Completed ) dürfte in ähnliches Fahrwasser geraten.....

( OKTOBER 2007 ) The sale, for $26 billion including debt, is a record for the hotel industry. New York-based Blackstone, which already owns the La Quinta lodging chain, joins Apollo Management LP and TPG Inc. in targeting hotel companies for their cash flow and real estate.

An Extended Stay failure reveals how a commercial real-estate downturn could ripple through the financial system.

When Lightstone Group and preferred equity partner Arbor Realty Trust bought Extended Stay from private-equity firm Blackstone Group in 2007, it borrowed more than $7.4 billion. Wachovia Corp., Bank of America Corp., Merrill Lynch & Co. and Fortress Investment Group put in $3.1 billion in so-called mezzanine financing, which isn't as highly secured as other types of debt. People involved in the transaction say an analysis of the company's value shows that much or all of the mezzanine debt could be wiped out in any renegotiated deal.

Bondholders have hired Houlihan Lokey Howard & Zukin for restructuring talks.

Extended Stay is still meeting its debt service, but people familiar with the matter say it could default within the next 60 days if the economic downturn continues as expected. Revenue per available room, or RevPar, a common hotel-industry measure, will be down more than 10% this year at Extended Stay, according to someone familiar with the matter. Much of that decline has come in the last two months.

But it was the Extended Stay deal that was Mr. Lichtenstein's biggest. Extended Stay has operations in 44 states and Canada. It was also among his riskiest deals, as

Lightstone, with help from Arbor Realty, arranged to put down just $600 million of equity, or 8% of the total price. (Blackstone, which made about $3 billion on the sale, kept an equity interest.)

Mr. Lichtenstein saw increasing demand from business travelers who needed hotel accommodations for weeks or even months at a time. He also believed he could unlock value at Extended Stay by taking advantage of the chain's size and paying more attention to management.

A couple of months after the deal closed, Mr. Lichtenstein acknowledged the easy money that helped him complete the deal had disappeared. "We were one of the last deals in," he said.

Troubles also have surfaced at Lightstone's Prime Retail division, which owns roughly 30 malls and shopping centers in the U.S. and Puerto Rico. Lightstone has sought to turn over at least six of its malls to lenders after falling behind on debt payments.

UPDATE via NYT:

Similar screenplays/attributes can be attached to almost every other deal from "pirate" equity since 2005....

Ähnlichen Drehbüchern dürften fast alle Übernahmen von "Pirate" Equity seit 2005 früher oder soäter folgen......

In a report by the ratings agency Standard & Poor’s, 86 companies weren’t meeting their debt obligations through mid-November of this year, with 53 of those, or 62 percent, having ties to private-equity firms at one point in their lives.

Commercial property "View from the top" / Economist

More on the topic Commercial property "Dizzying heights" UK / Economist , So Many Deals, So Much Debt ( The rise and possible fall from Harry Macklow in just 6 month) & Commercial Real Estate Prices May Drop 15% in Next Year

I also want highlight some excellent posts from Toro´s fine blog Am I Wrong About REITs? & REITs - What are Institutional CIOs Thinking? and from Mish Commercial Real Estate Abyss

Mehr zum Thema Commercial property "Dizzying heights" UK / Economist , So Many Deals, So Much Debt ( Die Geschichte eines Immobilienmoguls der binnen 6 Monaten alles zu verlieren droht) & Commercial Real Estate Prices May Drop 15% in Next Year

Zudem möchte ich noch auf diese beiden fundierten Posts von Toro hinweisen Am I Wrong About REITs? & REITs - What are Institutional CIOs Thinking? sowie von Mish Commercial Real Estate Abyss

View from the top It looks a long way down from the peak of the global market for office space

BANKING crises and property crashes often go hand in hand. That is one reason why America's housing bust has so troubled investors and policymakers recently. Commercial property, too, has a history of boom and bust that has brought havoc to the financial markets: think of the Japanese property slump during the 1990s, or Britain's secondary-banking crisis of 1973-74, when too much lending to property developers helped cause the London stockmarket's worst year of the 20th century.

Even though commercial and residential property do not necessarily move together, the same factors associated with the American housing market—tighter lending standards and slower economic growth—should hurt business demand for office and retail space as well. Like residential mortgages, loans for offices and shops have been bundled up and sold to investors. So could some swanky offices and shopping centres eventually suffer the subprime fate?

Until early this year there was plenty of evidence of hubris. In February the $39 billion paid by Blackstone, a private-equity firm, for Equity Office Properties, a big landlord, was a record price for a buy-out—and the seller, Sam Zell, has a reputation for shrewdly judging the top of the market.

> More details on the deal and why it is no wonder that this deal marked the top.....commercial property madness / numbers on the blackstone-eop manhatten sale

> Hier mehr Details zum Deal der gleichbedeutend mit dem Top gewesen ist.....commercial property madness / numbers on the blackstone-eop manhatten sale

In Britain, the share prices of property firms had surged ahead of the government's decision, after years of dithering, to introduce the tax-efficient Real Estate Investment Trust (REIT) structure in January. During part of 2006, more than half the money flowing into British mutual funds was invested in property.

For whatever reason, investors have since taken fright. “The market has had a bucket of cold water poured over it,” says Tony Horrell, head of European capital markets at Jones Lang LaSalle, a commercial agent. Shares in property companies took a battering over the summer, making the sector the worst performer in the American market in May, June and July, according to Lipper, an information group.

But is this really the start of another bust or simply some judicious profit-taking? Commercial property has been the asset to own this decade. Figures from the National Association of Real Estate Investment Trusts, an industry body, show that an investment in American property at the start of 2000 would have more than quadrupled in value by the end of last year. By comparison, the leading American share index, the S&P 500, returned just 8% over the same period.
This has not been just an American phenomenon. According to the Investment Property Databank, 16 out of the 21 national property markets it covers delivered double-digit returns last year. A global economic boom, allied with a desire by investors to diversify from equities and bonds, made property appealing.

Despite investors' enthusiasm, industry experts argue that the market has not seen some of the excesses that marked previous cycles. There has not been the kind of overbuilding of skyscrapers that usually spells severe trouble. The latest survey by Reis, a research firm, found that the vacancy rate in American offices was 12.5% in the third quarter, the lowest for six years. Rents grew by 2.4% between the second and third quarters, a slower rate than before but still a respectable one. Mr Horrell says that in most European markets the fundamentals for commercial property are good and that rents should continue to grow.

Andrew Jackson of Standard Life Investments, a fund-management firm, argues that commercial-property investors are not as dependent as their home-buying counterparts on borrowed money; the average gearing of the REITs he invests in is just 31%. As a result, tighter lending standards have not had the dramatic consequences that they have had in the residential sector. There has not, as yet, been the sharp rise in loan delinquencies that was seen in subprime mortgages.

The credit crunch has undoubtedly had an effect on confidence but so far it has not been catastrophic. “A number of transactions are on hold while investors wait to see how deals are repriced,” observes Jonathan Thompson, head of real estate at KPMG, an accountancy firm. “Debt is still available but the cost has gone up a bit and the loan-to-value ratio has fallen.”

Ken Cohen of Lehman Brothers says that the volume of new loans to finance property deals has fallen by half since May and June when credit was widely available. In turn, this has led to a sharp fall in the issuance of commercial mortgage-backed securities (CMBSs), the products that consist of repackaged loans which helped propel the structured-finance market before it seized up.

All spreads from B to AAA

That means property is likely to behave in a patchy fashion. Some markets that were overextended, such as Britain's, are already seeing a retreat for the first time in 15 years. Norwich Union, an insurance company, downgraded the valuation of one of its main property funds by 2-3% in September, while British Land, a leading property group, abandoned plans to sell a shopping centre in Sheffield in northern England. In other markets, investors may start to shun properties in poor locations or with low-quality tenants. But they will still be attracted by city-centre buildings that have been pre-let or by markets that are soaring, such as Asia's.

A lot may depend on whether the debt markets recover their confidence. In America, in particular, a healthy property market requires a revival in CMBS issuance. Mr Cohen of Lehman reckons that by the new year the market could be getting back to normal. Investors will be looking to make their allocations into property for next year, he believes, and it will help that they will not have been swamped with issuance in the second half of 2007.

Commercial property is no longer the bargain it seemed a few years ago, when rental yields were well above those on government bonds. But it will probably take a recession, in America and elsewhere, for the recent wobbles to turn into an outright crash.

> As my opening links suggest i´m more bearish than the Economist.....

> Wie Ihr evtl. anhand meiner Links feststellen könnt bin ich erheblich pessimistischer als der Autor vom Economist.....

So Many Deals, So Much Debt

Schadenfreude ! When the deal was announced in February ( see commercial property madness / numbers on the blackstone-eop manhatten sale ) i wondered back then what the hell Macklowe, Fortress & creditors were thinking.

Schadenfreude ! Als der Deal im Februar angekündigt worden ( siehe commercial property madness / numbers on the blackstone-eop manhatten sale ) habe ich mich schon damals gefragt was sich der Käufer und die Kreditgeber wohl denken mögen.

From the link in February

This article gives some good insight on the latest commercial property deals and shows very clear that "ordinary" people can´t understand what is going on. we are not smart enough to understand why you buy a portfolio at record (maybe peak) prices with a starting yield of 3% and including costs close to zero...... the only assumption that makes this deal work is that you double the rents? looks like this should be no problem because already 41 tenants in entire Manhattan pay the needed rent.......

Harry Macklowe, the New York developer, was flying high in February when he decided to buy a portfolio of prime Midtown Manhattan office towers for nearly $7 billion, using only $50 million of his own money.

Mr. Macklowe was already well represented in the Midtown market, where rents were rising at a staggering rate. His 2003 purchase of the General Motors Building on 59th Street and Fifth Avenue for $1.4 billion, though derided at the time as reckless, had been vindicated as the value of the building soared, enhancing Mr. Macklowe’s reputation as a visionary tycoon.

But as the crisis over subprime residential mortgages spills over into other real estate sectors, causing a severe tightening of credit, there is widespread talk in the industry that Mr. Macklowe is in deep trouble — so much so that he could lose control not only of the newly acquired portfolio but also of the G.M. Building and other properties that were used as collateral for short-term debt that must be repaid six months from now.

bigger/größer

Some real estate specialists say that the February acquisition of the seven Manhattan buildings — a deal consummated in just 10 business days —will be remembered not just as a feat of financial derring-do but also as a watershed that ended two years of frenzy in the commercial real estate market.

“If you’re looking for a poster child for what’s been going on, it could well be that deal,” said Mike Kirby, a principal of Green Street Advisors, a research company in Newport Beach, Calif., that specializes in real estate investment funds. “It had all the elements of the froth in the market — assets flipping left and right at ever-higher prices and excessive amounts of debt at ultracheap prices.”

> Macklowe marked the peak....

But in other signs of how the credit squeeze is affecting sales transactions, Tishman Speyer and Lehman Brothers recently postponed the completion of their $22 billion acquisition of Archstone-Smith, a real estate investment trust that owns interests in nearly 88,000 apartments, from late this month until early October. (Shareholders approved the sale yesterday.)

And a REIT that specializes in office buildings in Silicon Valley, Mission West Properties of Cupertino, Calif., said last week that its planned $1.8 billion acquisition by a private equity company had fallen through because the buyer’s lender had withdrawn from the transaction and no substitute lender could be found.

To be sure, the leasing market in many cities has been strong, nowhere more so than in Midtown, where landlords are now asking an average annual rent of more than $81 a square foot, a record, according to the brokerage firm CB Richard Ellis. Few large blocks of space are available. The default rate for commercial buildings has remained low.

But for several months, bond ratings analysts and others have warned that competition among commercial lenders has become so feverish that many are willing to finance 90 percent or more of the cost of the transaction based on overly optimistic projections that rents will continue to rise at a furious pace. In recent transactions, including Mr. Macklowe’s, the expected initial income from the buildings was less than 4 percent a year, with cash flow projected to rise significantly as leases expired and rents reached market levels.
But in the recent hot market, said Adrian Zuckerman, a real estate lawyer at Epstein Becker & Green, “people were not buying the income stream; they were buying the building for what they could sell it for in a year or two years.”

> Too bad that he bought at this "discount" prices.....

> Dumm nur das er zu diesen Schnäppchenpreisen zugelangt hat.....

The purchase price worked out to an average of $1,142 a square foot, the highest ever for a single portfolio..... Only one building, 666 Fifth Avenue, has traded for a heftier price: $1,200.

The Blackstone Group, the private equity company that recently went public, played on an even bigger scale. It bought Equity Office Properties, the nation’s largest office landlord, for $39 billion in February, and simultaneously began to dismantle it.

> EOP/Blackstone takeover

Without even taking possession of the buildings, Blackstone sold most of Equity Office’s portfolio in Manhattan to Mr. Macklowe in the transaction that is now raising questions. (The portfolio originally included the office portion of an eighth building, but that was later dropped from the deal.)

The problem for Mr. Macklowe is that much of the debt — $3.4 billion, according to Commercial Mortgage Alert, a weekly trade publication — is in the form of a short-term investment known as a bridge loan or preferred equity that must be repaid in February. Of that amount, about $900 million came from the hedge fund Fortress Investment Group, with the rest supplied by Deutsche Bank, Mr. Macklowe’s longtime lender. Mr. Macklowe pledged the G.M. Building and other assets as collateral.

Disclosure: Still short REITs / IYR

REITs Chart Of The Day

The Blackstone / Equity Office deal marked the top.......

Zufälligerweise hat der Balckstoen / EOP Deal das Top markiert........

Overall, the US real estate market continues to struggle and investors are concerned. For some perspective, today's chart illustrates the current trend of the Dow Jones Wilshire REIT Index. While REITs have been trending up for several years,

REITs are down over 15% since reaching their peak in early February of this year. As today's chart illustrates, REITs have broken well below their long-term uptrend (solid green line) and are now trending lower (dashed lines). Stay tuned...

Disclosure: Short REITs Index

A Warning on Risk in Commercial Mortgages / NYT

not a pretty picture....especially when the economy is slowing down and is close to a recession

kein schöner anblick...besonders wenn man bedenkt das die wirtschaft gearde in die rezession rutsch.

Spurred by the collapse of the subprime mortgage market, the leading bond rating agencies are beginning to crack down on what they see as risky lending practices in commercial real estate.

Low interest rates and an abundance of investment capital have led to heady times for buyers and sellers of office buildings, hotels and other income-producing property. Buildings have traded at record prices and loan terms have become increasingly generous, with many buyers putting little or no equity into the deals.

Like residential loans, commercial mortgages are pooled and packaged into bonds that are sliced up into portions carrying different degrees of risk. According to Moody’s, there were $769.6 billion in commercial mortgage-backed securities at the end of last year, representing 26.1 percent of all outstanding commercial mortgages, including apartment buildings.

The agencies that rate these bonds on behalf of bond dealers have issued warnings in the past, but last month they sounded a new note of urgency, saying for the first time that they would adjust their ratings to reflect their concerns.

“Underwriting has gotten so frothy that we have to take a stand,” said Jim Duca, a group managing director at Moody’s Investors Service. “The industry was heading to Niagara Falls.”

The readjustment is occurring just as signs are emerging that the office market is slowing down nationwide. Though rents continued to rise in the first quarter of this year, the average vacancy rate for 58 metropolitan markets across the country rose to 12.6 percent from 12.5 percent, the first increase for any quarter since 2004....

Cautioning that “a few months don’t represent a trend,” Mr. Steir said real estate was a cyclical business. “The key to success so far has been to be the high bidder on everything available,” he said. “At some point, that strategy stops working.”....

Standard & Poor’s said that in the first quarter of this year, the delinquency rate for such bonds fell to its lowest level since its delinquency index was created in 1999.

But many of the loans issued recently could result in problems down the road, the bond analysts said. As was the case in the overheated residential mortgage market, many loans for commercial transactions are interest-only for the first 10 years, with huge balloon payments at the end of the term. The agencies say lenders are not requiring landlords to set aside adequate reserves to cover taxes, insurance and other costs if things go wrong and are accepting projections for rent growth that may be too optimistic.

Fitch predicted a 15 percent increase in defaults of loans that are being written now.

Space in Manhattan that was leased a while back for an annual rent of $40 a square foot may reasonably be said to be worth $70 a square foot in today’s market, said Mr. Duca at Moody’s Investors Service. But he said some lenders were now claiming that space that was recently leased for $70 a square foot was actually worth $90 a square foot. “That’s how aggressive it is now,” he said. “We’re saying the lending environment doesn’t make any sense.”


In one spectacular example of a hastily concluded deal, Macklowe Properties, a Manhattan company, took only 10 business days to complete its $7.25 billion purchase of eight Midtown office buildings that had belonged to Equity Office Properties before Equity was sold to the Blackstone Group in what was then the largest leveraged buyout ever. The average annual rent for the buildings is $55 to $59 a square foot, but the deal was underwritten with projections of future rents of $100 a square foot or more.

>here are is one more detail of the deal!
>hier noch etwas um die zahl oben besser einzuordnen

Last year, 41 tenants in Manhattan agreed to pay that much or more, .(41 tenants in entire manhattan?! what a conservative concept......./ 41 mieter in gesamt manhattan..... klingt nach einem soliden concept)

http://tinyurl.com/25dbqf


While the agencies are just beginning to carry out their new credit-tightening standards, their warnings are already having repercussions in the bond market. Investors are demanding higher rates of return, making the bonds costlier for the dealers, said Rob Brennan, the global head of real estate financing for Credit Suisse. “The fact is that the marketplace forces the change immediately,” he said.

Last week, a new $4.2 billion commercial-mortgage-backed security offered by GE Capital had to be restructured after investors complained that the originators of several of the loans had relied too heavily on projected income increases from the buildings, according to Commercial Mortgage Alert, a weekly trade newsletter. Five loans totaling $226.7 million were removed from the offering, and the investment-grade portion of another loan was further trimmed by $50 million, the newsletter reported. Mr. Brennan said the proceeds from the bond could be reduced by as much as $8 million because the bonds with high yields sell for much less than the top-rated bonds.


Most of the loans removed from the offering were originated by Deutsche Bank, which also provided $6 billion in debt financing for the purchase by Macklowe Properties of nearly all the Manhattan portfolio of Equity Office Properties. .....

disclosure: short reit index

commercial property madness / numbers on the blackstone-eop manhatten sale

this article from the http://www.nytimes.com/ gives some good insight on the latest commercial property deals and shows very clear that "ordinary" people can´t understand what is going on. we are not smart enough to understand why you buy a portfolio at record (maybe peak) prices with a starting yield of 3% and including costs close to zero...... the only assumption that makes this deal work is that you double the rents? looks like this should be no problem because already 41 tenants in entire manhattan pay the needed rent.......

you really need an mba.......

good for blackstone. they need more transaction like this....and no wonder they are getting a little bit nervous...http://immobilienblasen.blogspot.com/2007/02/blackstones-john-gray-afraid-record.html




dieser bericht gibt nen guten einblick unter welchen umsänden und berechnungen die letzten deals im gewerblichen immobiliensektor in den usa gemacht worden sind. lest am besten selber. ich bin halt kein studierter......fakt ist das blakcstone mehr solcher deal benötigt um ihre 39 mrd$ übernahme profitable zu machen. einige werden da schon nervös (s.link oben)



The day after Harry Macklowe, the maverick real estate investor and developer, completed a record-breaking $7.25 billion transaction to buy all but one of the buildings in the Midtown Manhattan portfolio of Equity Office Properties, he called one of the city’s top commercial brokers......

But in recent years, Mr. Macklowe has had plenty of occasions for bursting into song. Defying conventional wisdom about real estate cycles, he and other New York real estate investors have been enjoying the longest commercial real estate boom in memory — and one that shows no signs of abating.

Famous in real estate circles for being able to act with dizzying speed, Mr. Macklowe and his son William took only 10 business days from start to finish to buy 6.1 million square feet of office space, according to people involved in the transaction.


Their speed enabled them to take possession of the buildings just as the Blackstone Group, a private equity firm, acquired Equity Office Properties, the nation’s largest office landlord, for $39 billion in the biggest leveraged buyout ever.http://immobilienblasen.blogspot.com/2007/01/equity-office-38-billion-takeover-sign.html

Within days of selling all of its new Manhattan acquisitions, except for the Verizon Building at 42nd Street and Avenue of the Americas (which Equity Office had agreed not to flip to another buyer after acquiring it from Verizon in 2005), Blackstone struck a total of $18.5 billion in deals with other companies to shed big chunks of its new portfolio. Investors snapped up 19 buildings in the Washington, D.C., area; 17 in Seattle; 17 in Portland, Ore.; and 17 in San Diego.

In addition, Maguire Properties, a public company based in Los Angeles, announced yesterday that it would buy 22 buildings in Orange County and two buildings in downtown Los Angeles from Blackstone for $2.88 billion.

Blackstone also intends to sell its new buildings in Chicago and San Francisco and other markets. But for now, according to a participant in the transactions, it will keep its holdings in West Los Angeles (10 buildings) and Boston (24 buildings), both markets where rents are expected to rise. Equity Office’s substantial footholds in West Los Angeles and Boston were among the chief reasons that Steven Roth, the chairman of Vornado Realty Trust, tried to wrest the company away from Blackstone.

Mr. Roth’s effort failed. But he managed to drive up the price of Equity Office by $3 billion, forcing Blackstone to adjust its strategy and sell more buildings than it originally intended to. Within 60 days, Blackstone will have disposed of more than half of the Equity Office portfolio of 500 buildings, according to the person involved in the transactions. A few years from now, all the buildings will be in other hands, he said. ......

Despite the haste with which the purchase was concluded, the Macklowes, who teamed with Fortress Investment, another New York private equity firm ( lets call it flipping! one pe to another....), were able to get $6 billion of financing from Deutsche Bank, ...Deutsche Bank, also one of Blackstone’s lenders, is expected to repackage the Macklowe mortgage as a security and sell it to investors. ( can´t wait for the details/ bin gespannt wie da die details aussehen)

The purchase price worked out to an average of $1,142 a square foot, the highest ever for a single portfolio..... Only one building, 666 Fifth Avenue, has traded for a heftier price: $1,200.

“You’ve got to give it to Harry; he’s got nerves of titanium,” .....

The $7.25 billion price tag for the eight buildings was based on a rate of return in the first year of about 3 percent. But when other costs like leasing commissions and repairs are deducted “it probably means that the net cash flow is pretty close to zero,” ......

To make the buildings profitable, real estate professionals say, annual rents, which currently average $55 to $59 a square foot, will have to rise to $100 a square foot or more — a daunting, but not insurmountable, goal. Last year, 41 tenants in Manhattan agreed to pay that much or more, .(41 tenants in entire manhattan?! what a conservative concept......./ 41 mieter in gesamt manhattan..... klingt nach einem soliden concept)

The new Macklowe buildings are full or nearly so, except for the Bertelsmann Building at 1540 Broadway, which is 84.4 percent occupied,

The eighth is WorldWide Plaza, a 47-story building on 49th Street and Eighth Avenue, a neighborhood that some brokers describe as “challenging.” But two large leases that were negotiated in the late 1980’s, when the market was depressed.... are up for renewal in 2009 presenting the Macklowes with an opportunity to squeeze more rent out of the space.



But Mr. Macklowe is also widely admired as someone who sees opportunities that other people miss. He bought the General Motors Building on Fifth Avenue and 59th Street in 2003 for the seemingly astonishing price of $1.4 billion ...... The building is now valued at more than $2.7 billion....

Though the newly acquired Midtown properties are all considered prime buildings, Equity Office was not known for its strong management. .........

“He’s taking a leap of faith, but he’s banking on the fact that demand is far greater than supply.”
disclosure: short reits

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.
http://immobilienblasen.blogspot.com/2007/01/equity-office-38-billion-takeover-sign.html

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 http://www.wallstreetfollies.com/

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. http://immobilienblasen.blogspot.com/2007/02/who-is-buying-reits-when-institutional.html


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 course....at leats none of their own pe arms is involved.....immerhin haben die banken nicht mit ihren eigenen pe abteilungen zugeschlagen)

disclosure: short reits (iyr)

equity office $38 billion takeover ....sign of the times

i think there is no better example to describe the weird markt action these days like the sale/bidding of equity office (eop). i´ve heard their last conference call in october 2006. today they anounced the full year results without a call. ttp://biz.yahoo.com/bw/070131/20070131005524.html?.v=1

ich denke es gibt kaum ein besseres beispiel um den "merkwürdigen" markt zu beschreiben als den kauf von equity office. ich habe seinerzeit den conference call vom oktober gehört. heute sind die jahreszahlen leider ohne call veröffentlicht worden.

you can see in the chart that since this call the bidding war between blackstone and vornado startet. blackstone has taken the lead with over $ 38b cash including debt. vno is considering another offer (including stocks).

UPDATE: vno just offered $56 a share. i think it is safe to say that this is not enough to outbid the cashoffer from blackstone

wie man am chart schön sehen kann ist der bieterkampf zwischen blackstone und vornado danach initiert worden. z.zt. führt blackstone mit einem gebot von 38 mrd $ in cash (inklusive schulden). vno erwägt ein höheres angebot (allerdings zum teil in aktien finanziert)

i think it is time to review some quotes from the call in oktober where the stockvaluations were round about 30% lower. i´m really not an expert on reits. but after this call a 30% pemium. and a softening us economy.........

es ist an der zeit sich einige zitate aus dem call erneut anzusehen. wie man nach diesen aussagen nochmal satte 30% auf den kurs draufschlagen kann ist mir rätselhaft......

review conference call: http://phx.corporate-ir.net/phoenix.zhtml?c=89060&p=IROL-EventDetails&t=Regular&EventId=1397915&

"it is a little bit crazy out there"

we are having $3 b assetsales on the block ( with an estimatetd 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 agressive biddings.

average debt yield at the end of 2006 at 6,31%


i think it is save to say that since then the us economy has not improved........

denke es ist richtig zu sagen das sich seitdem die us konjunktur nicht gerade verbessert hat.....

and of course blackstone is now doing just the opposite. piling on a mountain of debt. for sure a higher yielding debt than the 6,31% .... maybe they can sell the assets faster then the eop as a reit. they better hurry up......they are in danger to make a mess in one´s pants.....

blackstone macht nun genau das gegenteil von dem was das managment machen wollte. schulden bis unters dach. und sicher teurer als die exitierenden 6,36%. das einzige was sinn machen könnte ist das die keinerlei restriktionen beim zerlegen haben. dafür sollten sie sich aber beeilein. bei der kleinsten marktverschlechterung geht das ansonsten in die hose......

but this is a one way bet on rising property prices and increasing rents. the occupancy rate for 2006 is already at 92%. that leaves not much more room for improvement.

eine einzige wette auf weiter steigende immopreise und mieten. der vermietungsgrad lag 2006 bei sehr guten 92%. nicht mehr viel raum für ne optimierung.

not much room for error / no safety net

on top of this is that the dividend yield is under 3%, the pe is very high and looks more like a competitor to google :-) ( The regional Bloomberg property index trades at 22 times earnings, compared with 61 times for the U.S. measure and 26 times for the European one) etc......

dazu kommt noch das die dividenrendite bei 3% liegt. das kgv ist sehr hch und erinnert eher an google als an einen reit. lt. bloomberg reit kgv für die usa bei 61!

and even one of the best funds managers out there says that this is a good point to exit the us reit market http://immobilienblasen.blogspot.com/2007/01/sam-lieberreit-funds-manager-honest.html

disclosure: short us reits